F5 Inc

NASDAQ:FFIV

Earnings Call Analysis

Mixed Q4 Growth and Q1 Outlook

The company reported a modest growth in Q4 revenue to $707 million, with services climbing 9% while product sales declined, led by a 25% drop in systems revenue. Nonetheless, software and subscription revenues hit record highs, with subscription revenue alone jumping 27%. Americas revenue dipped 6%, though EMEA and APAC saw gains of 16% and 4%, respectively. A disciplined approach to operating expenses enhanced profitability, evident in a more than 600 basis point improvement in non-GAAP operating margins to 33.9%. For Q1, the company forecasts revenue between $675 million and $695 million, expects gross margins around 82%-83%, and targets non-GAAP EPS between $2.97 and $3.09.

Delivering and Securing Modern Applications in a Hybrid Multi-Cloud World

Deemed essential for large enterprises, F5's offerings serve modern applications and APIs that are container-native and microservices-based. The company has seen substantial adoption of NGINX for cloud and Kubernetes workloads, with demand scaling alongside application growth. Moreover, F5's NGINX App Protect is becoming increasingly vital for app layer security, with a significant uptake by e-commerce giants for container security compliances.

Embracing Distributed Cloud Services as a Future Growth Lever

With strategic investments fostering the growth of F5 Distributed Cloud Services, the company is placing bets on emerging growth markets such as web app and API protection (WAAP) and secure multi-cloud networking (secure MCN). Noteworthy customer wins across various regions, including EMEA and Latin America, underpin the competitive edge and the comprehensive solutions F5 offers, including firewall protections, bot defense, and Layer 7 DDoS protection. These services are rapidly gaining traction, especially among financial institutions and retailers undergoing digital transformations.

Fiscal Performance: A Story of Discipline and Growth Amidst Headwinds

F5 reported Q4 revenue of $707 million, a modest 1% year-over-year growth, driven by a mix of 54% from global services and 46% from product revenue. The global services sector showed a robust 9% growth, benefiting from high maintenance renewals and previous price increases. Product revenue experienced a 7% decline, with systems revenue falling by 25%. Conversely, software revenue increased by 11%, hitting a new high of $191 million, indicating a shift towards a software and subscription-based revenue model.

Investing in SaaS and Managing Transitions

A significant part of the story involves SaaS and managed services, which contributed $203 million to the annual revenue, marking a 2% year-over-year increase. However, Annual Recurring Revenue (ARR) from SaaS and managed services saw a slight dip of approximately 2%. This was attributed to underperformance in advanced anti-bot and anti-fraud solutions, customer migrations from legacy offerings, and strategic retirement of non-core SaaS offerings. F5 is witnessing a transition with $65 million of revenue undergoing changes, which may lead to planned revenue churn as the company refocuses its efforts on Distributed Cloud Services.

Security Revenue - A Crucial Pillar of Earnings

Security-based earnings are central to F5's revenue, accounting for approximately $1.1 billion, or 40%, of the total FY '23 revenue. Standalone security product revenue saw a 5% increase, reaching roughly $475 million. The growth in security services highlights the potential and effectiveness of F5's solutions against automated attacks and modern security challenges. Though customer spending caution slightly impacted the growth rate, the company's ability to navigate supply chain challenges and normalize lead times stands as a testament to its resilience.

Fiscal Year 2024 Forecast

Looking ahead, F5 anticipates a revenue range from flat to a low single-digit decline compared to FY '23, excluding a $180 million headwind from lower backlog shipments. The forecast includes continued growth in the term subscription and F5 Distributed Cloud SaaS offerings, balanced with an expectation of customer spending caution persisting into FY '24. The non-GAAP operating margin is expected to be between 33% to 34%, reflecting continued operational efficiency and expense discipline. Earnings growth projections fall between 5% to 7%, indicating at least a 10% growth on a tax-neutral basis. Lastly, the company commits to a share repurchase program, planning to use at least 50% of its annual free cash flow for this purpose.

A Vision Beyond Fiscal Year 2024

F5 has outlined a blueprint for long-term growth, focusing on mid-single-digit revenue expansion, margin improvement, and disciplined operating leverage. These strategies aim to deliver at least double-digit compound annual earnings growth. The company also emphasizes its intention to capitalize on its strong positioning in the multi-cloud sphere and customer dependency on its differentiated offerings. Buying back shares remains a key aspect of their value delivery to shareholders, committing to the allocation of a substantial part of the free cash flow towards repurchases.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, and welcome to the F5, Inc. Fourth Quarter Fiscal 2023 Financial Results Conference Call. [Operator Instructions] 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.

[Suzanne DuLong, executive]

Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations.

Francois 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 January 28, 2024.

The slide deck accompanying today's discussion is viewable on the webcast and will be posted to our IR site at the conclusion of our call. To access the replay of today's webcast by phone, dial [phone] or [phone] and use meeting ID 13741762. The telephonic replay will be available through midnight Pacific Time, October 25, 2023. For additional information or follow-up questions, please reach out to me directly at [e-mail].

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 Francois.

[François Locoh-Donou, executive]

Thank you, Suzanne, and hello, everyone. Thank you for joining us.

In my remarks today, I will speak to our Q4 and FY '23 highlights as well as our expectations for FY '24. Frank will then review the details of our Q4 and FY '23 results and provide some additional color about our outlook.

We delivered a solid Q4 in an environment that showed some additional signs of stabilization. We saw strength from our enterprise vertical, including technology and financial services customers, offset by softness from service providers. The result was Q4 revenue near the high end of our guidance range. Our continued operating discipline helped us deliver earnings per share well above the high end of our range. Our global services team delivered robust 9% revenue growth driven by strong maintenance renewals and reflecting the benefit of price increases announced last year.

In addition, software revenue grew 11%, aided by 27% growth in subscription software. Software revenue from renewals, which have performed well all year, picked up in Q4 over Q3. And while new subscriptions remained down year-over-year, we saw some improvement compared to the first half. Strength in global services and software offset a systems decline of 25%, which reflects a lower level of backlog-related shipments than we had for the first 3 quarters of the year.

Stepping back and looking at fiscal year 2023, we adjusted to the environmental challenges we faced, resolving supply chain pressures and largely returning to normalized delivery times. We took decisive actions to adjust our operating model to the realities of the demand environment, driving meaningful improvements to our operating margins and delivering 15% EPS growth. We also returned 58% of our annual free cash flow to shareholders via share repurchases.

Highlights from FY '23 include: first, subscription renewals performed largely to plan for the year. In today's tough IT spend environment, this is a strong signal that customers are getting the value and return they expect from our software solutions.

Second, F5's distributed cloud services, SaaS offerings are gaining traction with both new and existing customers. In fact, 29% of distributed cloud SaaS customers are new to F5. In total, we now have more than 500 customers for our SaaS services on distributed cloud, an increase of more than 200% since Q4 of last year. Third, we are having very good success displacing a traditional ADC competitor in both software and hardware form factors. And finally, we delivered meaningful operating improvements, driving our non-GAAP operating margin up 130 basis points from FY '22.

As we look ahead, we enter FY '24 in an environment that seems to be stabilizing. In fact, from a demand perspective, we saw encouraging early signs with enterprise customers in Q4, though it is too soon to say if what we are seeing is a durable trend. As we contemplate our outlook for FY '24, we consider a number of factors.

At the macro level, we expect continued application and API growth fueled by automation efforts and new use cases, including generative AI. We also expect customer spending caution persist into FY '24, but it's stable. And finally, we believe the tension between application and API growth and customers' ability to sweat assets will reach a tipping point, causing them to reinvest in their application infrastructure likely beginning sometime in FY '24.

At the F5 level, we also consider, first, we have an approximately $180 million revenue headwind from FY '23's backlog fulfillment, primarily in systems. Second, we expect flat to modest total software revenue growth in FY '24 as a result of a number of dynamics, including continued subscription renewal strength and steady distributed cloud SaaS revenue growth. These positive trends will be offset by a series of transitions we are executing in our SaaS and managed services offerings. And third, we expect our global services revenue will return to low single-digit growth as we lap price increases.

As a result of these factors, we expect our FY '24 revenue will be flat to down low single digits from FY '23, inclusive of the 6% headwind related to FY '23 backlog shipments. We also expect to return to mid-single-digit revenue growth in FY '25. Whether we achieve the low or high end of our revenue range, we are committed to driving continued strong profitability, and we will continue to manage our operating model with discipline.

We expect to deliver FY '24 non-GAAP operating margin in a range of 33% to 34%. We are also targeting FY '24 non-GAAP EPS growth of 5% to 7% reflecting growth of at least 10% on a tax-neutral basis compared to FY '23.

Our growth opportunity is fundamentally linked to the continued growth of applications and APIs and the need to secure, deliver and optimize those apps and APIs. F5 is the only company that can deliver, secure and optimize any app and API anywhere. Our security and delivery solutions offer a custom fit for each app and API. Modern apps and APIs require different solutions than legacy apps. We have the right solutions for both. In addition to delivering the right tools for the right app or API, our combination of deployable software and hardware and SaaS and managed service offerings means we are the only vendor that can serve every app and API across all environments, in a data center, public cloud and at the edge.

We are the only company who can do this today. And going forward, further integration and convergence of our solutions will make it much easier for our customers to secure and deliver their apps across all infrastructure environments. The power of our converged portfolio is resonating with customers who are able to deploy the solutions they need today with the knowledge that F5 will be with them on every step of their multi-cloud journey.

Before I pass the call to Frank, I will speak to some customer highlights from each of our product families. Our F5 BIG-IP family serves traditional applications either on-premises, co-located or in cloud environments. BIG-IP's data plane performance, automation capabilities and seamless integration into public cloud environments continues to differentiate the platform, and we continue to win against competitors. From a hardware perspective, the value proposition with our next-generation platforms is resonating with customers with our rSeries and VELOS platforms, representing more than 80% of Q4 systems bookings.

In one example of a BIG-IP win from Q4, we displaced a competitor at a North American health care customer. The opportunity arose as a result of the incumbent provider's inability to handle a mission-critical upgrade to the customer's physician portal. The customer selected F5 BIG-IP based on its advanced application delivery capabilities, secure access management, our partnership with their health care records platform and confidence in our road map. In addition to providing the mission-critical functionality the customer needed urgently, we replaced all of the competitors use cases with the customer, simplifying their application environment and future-proofing their data centers.

F5 NGINX delivered a very strong Q4. NGINX serves modern container native and microservices-based applications and APIs. We continue to see large enterprises adopt NGINX for their cloud and Kubernetes workloads, and as those applications scale, we are seeing our NGINX opportunity scale as well. In addition, customers are also leveraging NGINX for app layer security for containers. As an example, in Q4, when the e-commerce division of a global technology customer needed to comply with new data security standards, they selected NGINX App Protect to implement app layer security to the containers processing consumers' credit card data.

We have invested both organically and inorganically to build our F5 distributed cloud services, a portfolio of SaaS and managed services. Apart from the offering transitions I mentioned, we are really excited about the future for distributed cloud. We are intercepting 2 exciting emerging growth categories, web app and API protection or WAP and secure multi-cloud networking or secure MCN that will drive future growth for distributed cloud services.

In one WAP win for the quarter, we are helping an EMEA-based banking customer evolve from its traditional WAF security posture to a more comprehensive WAP solution that encompasses web application firewall as well as API protection, bot defense and Layer 7 DDoS protection. This customer approached us when they came under attack by a malicious foreign actor that their existing WAF could not handle. Against multiple competitors, we successfully demonstrated the superiority of our WAP offering, including our ability to protect major payment companies' APIs.

Early traction for our secure multi-cloud networking offerings includes a Q4 win with a large retailer in Latin America that also offers a range of financial services to its customers. As part of its digital transformation efforts, the customer needed a solution to enable them to grow and manage their expanding body of cloud-native applications. They also plan to migrate their large, existing footprint of virtual machines and on-premises appliances to the cloud. After a thorough proof of concept, the customer selected our secure multi-cloud networking solution because of our ability to use the customer edge to make the move 100% transparent to both internal users and consumers.

We are also seeing cross-portfolio traction with customers who are operating in hybrid environments, choosing to deploy F5 across multiple form factors. In a win that highlights the synergies of our product families, during Q4, we secured a win with an APAC-based financial services provider. The customer launched a multifaceted modernization project designed to add and consolidate applications and enable scalability to handle exponential traffic growth. They also needed help stopping a barrage of constant automated attacks.

In a competitive bid, our combination of BIG-IP and F5 Distributed Cloud Bot Defense won out. The combination enables the customer to manage unpredictable traffic growth, customize services for each application and enhance their security posture with our ML-based AI engine. These real life use cases offer a view to how we are enabling customers to secure, deliver, optimize and manage their applications and APIs and how we simplify the challenges of operating in a complex hybrid multi-cloud world.

Now I will turn the call to Frank. Frank?

[Francis Pelzer, executive]

Thank you, Francois, and good afternoon, everyone. I will review our Q4 and FY '23 results before I elaborate on the outlook Francois shared.

We delivered Q4 revenue of $707 million, reflecting 1% growth year-over-year with a mix of 54% global services and 46% product revenue. Global services revenue of $382 million grew a strong 9% due to continued high maintenance renewals as well as the price increases we introduced last year. Product revenue totaled $325 million, down 7% year-on-year.

Systems revenue of $134 million declined 25% year-over-year, reflecting a lower level of backlog-related shipments than we had in prior quarters and demand that showed some signs of stabilization albeit at lower levels than we have seen historically. In contrast, software revenue grew 11% over the year ago period to a new high of $191 million. Subscription-based revenue grew 27% year-over-year to $166 million, another record high, representing 87% of Q4's total software revenue. Perpetual software license sales of $25 million represented 13% of Q4 software revenue.

Revenue from recurring sources contributed 76% of Q4's revenue, another all-time high. Recurring revenue includes subscription-based revenue as well as the maintenance portion of our services revenue. On a regional basis, revenue from Americas was down 6% year-over-year, representing 57% of total revenue. EMEA grew 16%, representing 26% of revenue, and APAC grew 4%, representing 17% of revenue.

Looking at our major verticals. During Q4, enterprise customers represented 72% of product bookings. Service providers represented 9% and government customers represented 19%, including 7% from U.S. Federal. Our Q4 operating results were strong, reflecting operating discipline and a full quarter benefit from the cost reductions announced in April. GAAP gross margin was 80.1%, non-GAAP gross margin was 82.7%, an improvement of 125 basis points from Q4 of FY '22.

GAAP operating expenses were $394 million, non-GAAP operating expenses were $345 million. Q4 non-GAAP operating expenses as a percent of revenue was below 49%, resuming pre-2019 acquisition levels. Our GAAP operating margin was 24.3%. Our non-GAAP operating margin was 33.9%, representing an improvement of more than 600 basis points from Q4 of FY '22.

Our GAAP effective tax rate for the quarter was 13%. Our non-GAAP effective tax rate was 14% below our initial expectations for the year as a result of IRS guidance issued during the quarter relating to foreign tax credits. Our GAAP net income for the quarter was $152 million or $2.55 per share. Our non-GAAP net income was $209 million or $3.50 per share well above the top end of our guidance range of $3.15 to $3.27 per share. This reflects the combined impact of our gross margin improvements and operating expense discipline as well as the Q4 tax benefit.

I will now turn to cash flow and the balance sheet, which also remained very strong.

We generated $190 million in cash flow from operations in Q4, driven by our improved profitability. Capital expenditures for the quarter were $15 million. DSO for the quarter was 58 days. Cash and investments totaled approximately $808 million at quarter end. Deferred revenue increased 5% year-over-year to $1.78 billion. We repurchased $60 million worth of shares in Q4. For the year, we used 58% of our approximately $600 million of free cash flow for share repurchases. I note that in each of the past 3 years, we have met or exceeded our share repurchase commitments. Finally, we ended the quarter with approximately 6,500 employees.

I will now recap our FY '23 results.

For the year, revenue grew 4% to $2.8 billion. Global Services revenue grew 7% to $1.5 billion, representing 53% of total revenue for the year. Product revenue grew 1% to $1.3 billion, representing 47% of total revenue. For the second year in a row, software represented roughly 50% of product revenue. Software revenue was flat compared to last year at $664 million. This was down from our initial expectation of 15% to 20% growth as a result of customers delaying large transformational projects. As Francois noted, software renewals performed largely as planned. We delivered $671 million in systems revenue during the year, representing 3% growth.

I would now like to provide some additional information regarding software revenue.

We've said we intended to provide additional software revenue details as the SaaS business scaled. As we said last October, we had several SaaS and managed service transitions planned. We started these transitions in FY '23, and they will continue through FY '24 and FY '25, leading to some short-term revenue variability that is not necessarily indicative of potential future performance. We believe that providing visibility to our SaaS and managed service revenue and to the transitions that are underway provides greater clarity on both our FY '24 revenue expectations and our expectation of returning to mid-single-digit revenue growth in FY '25.

Today, I will speak to 3 components of our FY '23 software revenue. The first, term subscriptions; the second, SaaS and managed services; and the third, perpetual licenses. We intend to continue to report the SaaS and managed service portion of our revenue on an annual basis going forward.

In FY '23, revenue from term-based subscriptions comprised of BIG-IP and NGINX subscriptions contributed $353 million to software revenue, up 9% year-over-year. Under ASC 606, sales of term-based subscriptions are recognized largely upfront as software revenue. The remainder is deferred and recognized as service revenue over the term of the subscription. The majority of our term-based subscriptions are contracted for 3 years. Term subscriptions include both new, renewal and true forward or expansion revenue for both annual and multiyear subscriptions of deployable software. New revenue includes new customers as well as new use cases or offerings sold to existing customers.

In FY '23, renewal and true forward or expansion revenue experienced healthy year-over-year growth, offsetting the weakness in new term subscription software projects. Renewals performing largely to plan in FY '23 is encouraging for several reasons. First, given the current levels of customer spending scrutiny, strong renewals are a signal that customers are getting the value they demand. Second, our renewals motion is still relatively new and it's great to see confirmation that it is working as intended.

The second component of our software revenue, SaaS and managed services, contributed $203 million in revenue in FY '23, up 2% year-over-year. SaaS and managed service is comprised of our F5 distributed cloud SaaS offerings. Revenue from managed services, including our legacy F5 Silverline offering and our anti-bot and anti-fraud offerings as well as revenue from legacy SaaS offerings. SaaS and managed service sales are recognized ratably as product revenue over the term of the subscription.

At the end of FY '23, our SaaS and managed services ARR was $198 million, down approximately 2% year-over-year. There were 4 primary contributors to this performance. First, we are seeing solid early momentum from our F5 Distributed Cloud Service SaaS offerings. Second, in FY '23, our most advanced anti-bot and anti-fraud managed service solutions underperformed relative to our plan as a result of customer spending caution and budget scrutiny. Third, in FY '23, we began migrating customers from our legacy Silverline managed service offerings to our F5 Distributed Cloud SaaS offering. And fourth, we began executing the planned retirement of legacy SaaS offerings from companies we acquired. Both the Silverline customer migrations and the retirement of legacy SaaS offerings resulted in planned revenue churn.

The third component of our software revenue is perpetual licenses, which contributed $108 million in software revenue, down year-over-year after unusually strong FY '22.

In FY '23, 71% of our revenue was recurring, up from 69% in FY '22. Several years ago, we began breaking out our security-related revenue annually. This year, our total security revenue, which includes stand-alone security, attached security and security related to maintenance revenue was approximately $1.1 billion or 40% of total revenue. Our stand-alone security product revenue grew 5% to approximately $475 million. We are seeing good traction with the lower-end anti-bot offering delivered through Distributed Cloud Services as well as from security on NGINX.

Our FY '23 security revenue growth was affected by customer spending caution, including stalled transformational projects and the underperformance of advanced anti-bot, anti-fraud solutions, as I mentioned previously. During the year, we overcame supply chain challenges and successfully returned our lead times to normal levels. As a result, our FY '23 product backlog returned to pre supply chain challenge levels and we closed the year with approximately $53 million in product backlog.

I will now turn to our FY '23 operating performance.

GAAP gross margin in FY '23 was 78.9%. Non-GAAP gross margin was 81.5%, down 110 basis points from FY '22 as a result of higher supply chain costs in FY '23. Our GAAP operating margin for FY '23 was 16.8%, and our non-GAAP operating margin was 30.2%, up 130 basis points from FY '22 as a result of our previously announced cost reductions.

Our GAAP effective tax rate for the year was 18.7%. Our non-GAAP effective tax rate for the year was 18.3%. Our FY '23 annual tax rate was lower than expected primarily due to IRS guidance issued during the fourth quarter related to foreign tax credits. GAAP net income for FY '23 was $395 million or $6.55 per share. Non-GAAP net income was $705 million or $11.70 per share representing growth of 14.8% over FY '22.

Francois outlined our annual and longer-term outlook at the start of the call. I will recap it with some additional color. I will also provide our outlook for Q1. With the exception of revenue, my guidance comments reference non-GAAP metrics.

In our FY '24 outlook, we've made the following assumptions. We expect customer spending caution will continue into FY '24, but we also expect customers will begin to reinvest at some point in the year. We expect our Global Services revenue will return to low single-digit growth as we lap price increases. We have approximately $180 million revenue headwind in systems from FY '23's backlog fulfillment. We expect to continue to take share in the traditional ADC space with BIG-IP in both hardware and software form factors.

Within our software revenue, we expect continued strength from our term subscription renewals and continued growth from our F5 Distributed Cloud SaaS offerings. As I discussed previously, we will have some planned revenue churn as we work through the SaaS and managed service transitions I discussed. We expect these transitions will be largely complete in FY '25. In FY '23, any ARR associated with the transitions is approximately $65 million, a little more than half of which is associated with the offerings we intend to transition on to distributed cloud over the next 2 years.

The net of these assumptions combined with the current demand levels leads us to expect FY '24 revenue in the range of flat to down low single digits from FY '23. Excluding the $180 million or 6% headwind from our FY '23 backlog reduction, our guidance range would reflect low to mid-single-digit revenue growth in FY '24. Whether we achieve the bottom or top end of this range largely depends on when customers resume more normal levels of spending. We expect some continued quarter-to-quarter variability as a result of upfront revenue recognition related to our term subscription offerings.

Regardless of our revenue performance, we remain committed to driving strong profitability. From an operating perspective, we expect gross margin will improve in fiscal year '24 to the range of 82% to 83%. This is primarily the result of supply chain-related cost pressures working their way out of our model. We expect our continued operating expense discipline will result in FY '24 non-GAAP operating margin in the range of 33% to 34% for the year. On a percent of revenue basis, this would put our operating expenses roughly in line with 2018 levels at roughly 49% of revenue. We expect our FY '24 effective tax rate will be 21% to 23%. In FY '24, we expect to deliver 5% to 7% non-GAAP earnings growth, which translates to at least 10% year-over-year growth on a tax-neutral basis.

Finally, we expect to use at least 50% of our annual free cash flow for share repurchases consistent with the approach we have discussed previously. As of the end of FY '23, we had $922 million remaining on our previously announced authorized share repurchase program.

We also want to take the opportunity to speak to our expectations beyond FY '24 as we believe it will help signal how we intend to run the business longer term. As Francois noted, we expect mid-single-digit revenue growth in FY '25. We expect to drive additional gross margin improvements and to deliver gross margins between 83% and 84%. We expect to grow our operating expenses slower than revenue, resulting in an operating margin of at least 35%. We will continue to prioritize profitability, adjusting our operating model, if needed, to enable us to deliver at least 10% compounded annual non-GAAP EPS growth. Finally, we intend to continue to use at least 50% of our annual free cash flow towards share repurchases.

I'll conclude with our expectations for Q1 of FY '24. We expect Q1 revenue in the range of $675 million to $695 million. We expect gross margins in the range of 82% to 83%. We estimate Q1 operating expenses of $332 million to $344 million. We are targeting Q1 non-GAAP EPS in the range of $2.97 to $3.09 per share. We expect Q1 share-based compensation expense of approximately $58 million to $60 million.

I will now turn the call back over to Francois. Francois?

[François Locoh-Donou, executive]

Thank you, Frank.

Before we open the call to questions, I want to address our view on F5's AI opportunity. At the highest level, we believe customers' use of AI will accelerate the growth of applications and APIs and the corresponding need to deploy, manage and secure them, which is what we do best. We also believe AI inference, the process of using a trained model to make predictions on never-seen-before data will become increasingly distributed. Organizations will need to support it anywhere from data centers, to manufacturing floors, to public clouds. We believe every application and API will soon require inference just as they require security and traffic management.

With our rich history of delivering innovative ML-based security solutions, including bot defense, protection against denial of service attacks and anti-fraud and our role in the flow of application traffic, we are uniquely positioned to secure AI workloads wherever they reside and to empower our customers to run AI wherever they need it.

In conclusion, we are leveraging our incumbency and our position in the flow of 40% of the world's Internet traffic to deliver hybrid multi-cloud solutions that dramatically simplify application and API deployment, security and management for our customers. We are also significantly reducing our customers' total cost of ownership. We are uniting and automating all of our customers' apps and APIs across their data centers, cloud and edge environment. We are encouraged both by the early signs of stability we saw in the second half of '23, and with the resonance our converging portfolio is having with customers. We have an installed base of 20,000 customers, all of whom have an acute and significant multi-cloud challenge. Other than F5, there is no one company that can address this challenge. With F5 Distributed Cloud Services, we have created a platform to drive SaaS growth in the future.

In closing, I will reiterate the 3 pillars of our long-term operating model, which will enable us to drive double-digit earnings on a compound annual growth rate. Number one, delivering sustained mid-single-digit revenue growth supported by our differentiated positioning in attractive end markets, along with our durable, high-margin global services business. Number two, driving non-GAAP operating margin expansion, which we will achieve through gross margin improvement and operating discipline; and number three, returning cash to shareholders via share repurchases using at least 50% of our annual free cash flow.

Operator, please open the call to questions.

[Operator]

[Operator Instructions]

Our first question comes from the line of Amit Daryanani with Evercore.

[Amit Daryanani, analyst]

I guess, Francois, maybe to start with, you talked about software growth being flat to, I think, up modestly, but that included some of the headwinds around the business transition you're taking place on the managed services side. I didn't appreciate this, but is the headwind from this transition $65 million? Or is it half that number? And maybe just flesh out how much that is and what are the transitions that you're doing?

[François Locoh-Donou, executive]

Amit, so in total, so we talked about roughly $200 million SaaS and managed services. In that $200 million, there's about $65 million of revenue streams that essentially are going to go away. Now about more than half of that is revenue streams coming from a legacy manager of this platform, Silverline, that we are retiring. But we intend to migrate the customers over to distributed cloud. So we would expect a portion, if not -- well, a significant portion of that revenue stream to go on to distributed cloud over time.

The other, a little less than half of that $65 million are offerings that we are retiring completely, that -- when we looked at our portfolio and looked at the offerings we wanted to rationalize that we felt were underperforming, we decided to retire these offerings completely to focus on the products that are going forward and successful, rationalize our cost and improve our efficiency.

[Amit Daryanani, analyst]

Got it. That is really helpful to get -- understand the split on the $65 million. And then I think, Francois, in your comments, you sort of talked about you're seeing encouraging signs from enterprise customers in September quarter. Can you just perhaps talk about what are these signs? Is it just the assets are running at high utilization, you can't flip them anymore? And is there any sort of geo vertical where you're starting to see these initial positive signs that you made from customer demand?

[François Locoh-Donou, executive]

I mean, I wouldn't say there is a particular geography where we're -- that's really different than others. I would say North America has been probably more solid and stable than our Asia and European markets. If we look at verticals in terms of where we're seeing stabilization, I think the enterprise market, we're seeing more stabilization. The service provider market has been soft. That's for a number of factors, service providers continue to sweat assets and be really ruthless in their prioritization. The 4G to 5G transition is a little slower than anticipated. So service providers in general have been soft, and we're kind of expecting that to continue.

What we were encouraged by, especially in the second half of the year, but specifically in Q4 is in the enterprise space, specifically, we saw some customers that had been sweating their assets and got to kind of at the end of that cycle that started demanding hardware again or ordering hardware again. And so we did see a rebound in hardware orders in the fourth fiscal quarter, coming from, a, we think some customers having swallowed their assets, but also it took a long time for us to ship equipment to a number of our customers in 2023. And in Q4, we saw some of these customers that finally had received their hardware and had been able to deploy that to start ordering again. So we were encouraged by those trends.

[Operator]

Our next question comes from the line of Alex Henderson with Needham.

[Alex Henderson, analyst]

Looking back at your prior longer-term expectations, I think you had talked about growth rate in software in excess of 20% and high to mid-single declines in systems. Can you give us an update on what you think those percentages might look like longer term once you get through the wobble in FY '24?

[François Locoh-Donou, executive]

Yes. So Alex, we're -- so today, we're -- so I don't want to talk about what's beyond FY '25. I'm going to talk about FY '24 and '25. Beyond FY '25, I think our view of our end markets haven't really changed. And so in the future, that opportunity to return to 20%-plus growth in software, if they're based on the end markets that we are targeting. But let's talk about FY '24 and FY '25.

So FY '24, we've talked about growth in software being flat to modest. And that's -- if you think the 3 components of software that we've just talked about, we expect the perpetual base of the business to be roughly flattish. We have a similar view on the SaaS and managed services part of the business based on the transitions we're going through. And potentially, in term subscription part of the business is where potentially we would see some modest growth.

Going into 2025, from a revenue perspective, we don't necessarily expect growth from perpetual or the SaaS and managed services business because of the transitions that we're going through. But we have strong visibility into our -- the renewals and expansions in our term subscription business. The expansions are very strong from what we're seeing, and we expect that to continue and be amplified in 2025. So in 2025, we would expect software growth to return to double digit really powered by our term subscription business.

[Alex Henderson, analyst]

I see. And just if I could follow up, you talked about your backlog having been normalized. You've also had orders out for components that were driven off of the tight supply environment. When do you expect the full normalization of the component costs in your cost of goods sold? Is that already achieved? Or is that going to be something that's going to feather in over the next year, maybe 1.5 years?

[Francis Pelzer, executive]

Alex, it's Frank. So largely, most of that has been achieved, but there is still some of the purchase price variances that are coming through in FY '24. By FY '25, we expect that to be fully out in a normalized level.

[Alex Henderson, analyst]

Can you give some sense of what the '24 variance would be?

[Francis Pelzer, executive]

Alex, I think it's probably in the range of 25 to 50 basis points where we'll see improvement just based off of that in comparison to expectations for gross margins in FY '25.

[Operator]

Our next question comes from the line of Samik Chatterjee with JPMorgan.

[Samik Chatterjee, analyst]

I guess, Francois, just related to your fiscal '25 outlook for mid-single digit, I'm just curious if you've changed your view about what the long-term trajectory in systems demand looks like, particularly as you mentioned, you've seen orders pick up a bit. And maybe you can also talk about -- when you talked about AI demand, do you expect -- how do you expect it to play out between systems related to sort of software within your portfolio? And I have a quick follow-up.

[François Locoh-Donou, executive]

Samik, thank you. So over a long period of time, I think we think the hardware business would be more of a low single-digit decline over time. However, that is a statement that is based on, first, a normalization of the hardware business. And we're not there today, right? There's been -- as you know, the demand was much softer in 2023. And so we actually expect our hardware business to rebound in 2024, and we saw some signs of that already in this fourth quarter. And I'm giving you more of a long-term trend kind of beyond 2025. But I think at least for 2024, we expect a rebound in the hardware business.

In terms of where AI will play in our business. So the way to think about it, Samik, is we -- the portfolio that we're putting together, which is hardware, software and SaaS, we expect that will enable our customers to secure and deliver their API and their applications in any environment.

AI workloads are going to be modern applications some of which may run on prem, but we think a lot of them will run in software environments. And so it's likely that supporting AI workloads will accrue more to our software business over time. And in addition to that, we think we have a very unique position in that with our distributed cloud capabilities, we are able to run inferences really in any cloud environment and beyond. So we can run inferences in any public cloud. We can run it at the edge, we can run it in our own cloud. And increasingly, we're hearing from customers that they will want to run these inferences on manufacturing floors or in retail branches for retail customers or in vehicles for some far edge use cases. And we have the ability to run and secure and deliver these inferences in any environment, whether it's in the cloud or in any one of these far edge environments and that makes F5 very unique in its position for running AI inferences in the future. All of that, of course, will accrue to our software business.

[Samik Chatterjee, analyst]

Got it. Before I follow-up, Francois, you mentioned the green shoots you're seeing in terms of enterprise spending and the recovery there. I think one of the pushbacks we've seen from investors on that front has largely been the expectation that there might be a pickup here in the back end of the year just from a budget flush perspective from the enterprises and you might sort of see you pull back again as we enter into next year and more sort of budget cuts. Any insight that you're already getting from your customers about how budgets look for next year or in relation to whether this sort of pickup has anything to do with the more temporary flush of budgets before the year-end?

[François Locoh-Donou, executive]

Thank you, Samik. I don't think it was related to budget flush for the end of the year because the comments we made in resumption were really things we observed in the quarter that ended in September for us. When we look at next year, no, we do not have visibility into exactly what budgets our customers will have in FY '24. We do have a strong pipeline entering the fiscal year on hardware. And now it will come down to what are the close rates on that pipeline. .

In Q4, the close rates that we saw on our pipeline entering the quarter were better than in the prior 3 quarters of the year. That's also part of why we talked about stabilization and green shoots in Q4 is because of what we saw in the close rate. So we're going into the fiscal year with a stronger hardware pipeline, recent data points are on close rates that are positive. But of course, we are cautious because there's still a lot of uncertainty out there around the macro as you noted. We continue to see customers in certain occasions delaying deals or having continued budget scrutiny and more approvals. We are seeing that phenomenon continue. And so overall, we're still cautious going into the year.

[Operator]

Our next question comes from the line of Meta Marshall with Morgan Stanley.

[Meta Marshall, analyst]

Maybe building on Samik's question to start. As you look at your pipeline, is your view that a lot of this is, okay, we've sweated assets as much as we can or the utilization of the appliances is too high? Or are we starting to see kind of growth in multi-cloud projects again? Just trying to get a sense of as you look at your pipeline, is it kind of traditional applications are expanding use cases?

And then maybe as a second question, you mentioned kind of having plays as AI and inference cases grow, is that going to require productization of any kind of suite of products today or just kind of tailoring to kind of have AI-ready solution?

[François Locoh-Donou, executive]

Thank you, Meta. So let me start with the first question. And my comments on pipeline, they are more related to what we're seeing on the hardware side of things where we had a number of customers that number one, have been sweating their assets and they're getting sometimes the utilization levels where we know that at some point in '24, they will have to do something. Or number two, customers who have placed orders in FY '22 have not been able to receive equipment for these orders who now have and have started to deploy that capacity and are starting to be ready to order again. So that is accruing to a stronger hardware pipeline.

In terms of big kind of multi-cloud software, what we call this transformational software project, we are not yet seeing a substantial resumption of these kinds of projects. And that's what I was saying earlier, customers are still very cautious on undertaking big projects like that. And we're not seeing a different pattern going into the year on those aspects.

As it relates to AI and whether it will require productization, we have, essentially -- so on the aspect of being able to run inferences in any environment, we have these capabilities in distributed cloud. I think we need to ensure that we harden these capabilities, and there's a strong go-to-market effort to be made around that to make customers aware of that in the future as they start deploying AI workloads. As it relates to being able to secure and deliver AI workloads, those capabilities exist today, and we are ready to go with that already.

[Francis Pelzer, executive]

Meta, I just wanted to add that last year we talked about in our outlook, particularly in software that we were a little less than 50% of our outlook at the time was coming from the renewals and the true forward portion of our term subscription agreements and that -- and our SaaS-based of revenue. And that's a little more than half is going to come from new this year as we take a look at that same formula and we look out, over 60% of what we expect in that flat-to-modest software growth is coming from both the renewal pieces of the SaaS and managed service business plus the renewals of true forwards of our term subscription business. So we try to take into account the fact that we don't see these transformational projects on the horizon as we thought about the guidance.

[Operator]

Our next question comes from the line of Michael Ng with Goldman Sachs.

[Michael Ng, analyst]

Thank you for all the comments on the outlook. I just had 2, both on software. First, I was just wondering if you could talk a little bit about your visibility into the term business. You called out term as something that would help drive the double-digit software revenue growth in fiscal '25 as well as potential growth in fiscal '24.

And then second, I was just wondering if you could talk a little bit more about this migration from Silverline to DCS. It sounds like it's a multiyear headwind, something that contributed to the weakness in ARR in fiscal '23. But it also seems to be a headwind in fiscal '24 and fiscal '25. So maybe you could just talk about that and how that transition is rolling off and over how many years?

[Francis Pelzer, executive]

Sure, Michael. I'm going to start with the first question, and I'll let Francois jump in on the second on the Silverline side. So on the first, on the term subscription, particularly the true forwards and the expansions that we have seen with the second terms coming on, and we've had probably about 7 or 8 quarters now of run rate and are getting much more comfortable with the early signs that where massive expansions continue. And so getting very, very strong utilization from the -- from that base of deployed, flexible consumption programs. And this specifically covers right now, BIG-IP and the NGINX portfolio within our business, as I mentioned in the prepared remarks. And that's giving us a lot of comfort, both in FY '24 and more importantly, in FY '25. FY '25, we've got a bigger pool of expansion revenue than we do in FY '24 and '24 is growing on top of '23. So all of these continue to compile upon themselves.

As I just mentioned to Meta that more than 60% of the outlook that we've got within our software revenue is coming from that cohort that we feel pretty good about seeing, which is the term renewals as well as true forwards plus the SaaS managed service renewal piece that we've got in the revenue stream. So both of those, we feel very confident about, and it's probably the highest visibility that we've got within the revenue stream.

[François Locoh-Donou, executive]

Thank you, Frank. And to your second question, Michael, on SaaS and managed services. So if we talk about FY '22 to FY '23, you saw that the ARR there was flat to slightly down. There are 2 reasons for that. One is, yes, the transitions we talked about started in '23, and there was about, call it, roughly $12 million of ARR that we've transitioned out of the business in 2023.

The other reason is -- at the high end of the bot business, we saw quite a bit of softness, especially in the second half of the year as customers had significant budget scrutiny and were reluctant unless they were under immediate attack to really implement our more sophisticated solutions. We think, over time, that will change. But specifically this year with the macro pressures and budget scrutiny, we saw a lot of softness there, both in new bookings and in some churn in some cases. So that is the FY '22 to FY '23 view.

From -- going into 2024, you asked about is this transition is a multiyear transition? Yes, we expect that the $65 million of revenue stream that we are transitioning will work themselves out over the next couple of years. So over FY '24 and FY '25, they are a headwind to total growth. However, we are quite excited by what's happening with the SaaS portion of our offerings, specifically SaaS on F5 Distributed Cloud. We have launched a WAP offering, a security offering, about 18 months ago, we are seeing extraordinary traction on that. As I said earlier, we've won over 500 customers in that period, all of whom are enterprise customers. And we are seeing very rapid traction on that.

We're also seeing rapid traction on the multi-cloud networking market, where we bring both networking and security capabilities, and we're quite differentiated to anybody in the market. So that has grown fast, and we expect that portion of the business to continue to grow fast and over time become a majority of this SaaS and managed services portfolio.

[Operator]

Our next question comes from the line of Tim Long with Barclays.

[Timothy Long, analyst]

Two from my side as well. First, Francois, I think you talked about replacing a competitor with ADC, both hardware and software domain. Could you dig into that a little bit more? Is that something that you think was kind of some one-off? Or do you think there's a sustainable move there? And how is that happening? .

And then second, just on the changes in the transitions in software. It sounds like moving to distributed cloud services makes a lot of sense. Having looked at some of those businesses and kind of moving on from them, does that change your view of kind of synergies across product offerings? Or is it a sign that maybe those businesses didn't have the same synergy and that's why you're not going forward with them?

[François Locoh-Donou, executive]

Thanks, Tim. Maybe let me start with the second part. No, it's not about synergies. So there are 2 aspects of that, Tim, in terms of the transitions, we're talking about the $65 million of transition. One is a legacy platform that we have that -- on which we have built managed services offerings. We have now built with F5 Distributed Cloud, a much more modern platform with an architecture that's differentiated. And that's getting rapid traction, and we want to transition our customers to this modern platform. And that was always the plan. That was always the plan to do that. However, we had to, first of all, build the platform and build all the security capabilities on the platform to be able to start this transition. So we're very excited that we were able to do all this work on the Volterra platform over the last couple of years, and we're able to start this transition in 2023.

The second part of the revenue stream that is being retired, it's not about synergies. It's new offerings that we have launched recently that we hoped would do well in the market. But given the macro environment, and what we've seen of the early traction of these offerings, we made some decisions, as you know, in April to rationalize our portfolio and focus on the most attractive investment, and we decided to not go forward with these products. So that's the second part of your question.

On the, I should say, the last thing I would say about that is in terms of the synergies between elements of the portfolio, no, we are actually very encouraged on what we're seeing. We're seeing actually a number of customers who already have BIG-IP adopt Distributed Cloud also for a set of applications. They have BIG-IP on-prem or in the cloud, so hardware or software. And then they want to have Software-as-a-Service for other applications in their estate, and they really want to have the consistency of security engine, security policies across all these environments. And we're able to do that with BIG-IP as well as our SaaS and managed services.

NGINX also had a very strong quarter in Q4, and that was driven in part by the security capabilities that we ported from BIG-IP onto NGINX, and that same security stack is now in use in Distributed Cloud. So the synergies, especially in terms of security across our portfolio are playing out. And we expect that they will accelerate actually over the next couple of years as we do more and more convergence between the SaaS and deployable products.

Now to the first part of your question. In terms of the ADC competitors. Look, Tim, here it's -- we have, over the last 4 years, we made a decision to continue to invest in the future of the ADC franchise and specifically building the next-generation hardware form factors for our ADC franchise and the next-generation software form factors that together bring to on-prem deployments, the benefit of the cloud, such as multi-tenancy, rapid upgrades, seamless upgrades and make it way easier for customers to operationalize ADCs and have a better total cost of ownership. Those investments are paying out in the market in terms of us gaining share and being able to displace our traditional competitors in -- even in situations where they are incumbent and take share from them.

And we think that that's not a one-off. Our expectation is that will continue, and we're pretty excited because this year, we're introducing the next-generation software platform on BIG-IP that we think is also even more differentiated than what we've had in the market. So I expect that that will continue, and it's hopefully a payoff for the investments we've made over the last 4 years.

[Operator]

Our next question comes from the line of Ray McDonough with Guggenheim.

[Raymond McDonough, analyst]

Francois, given some of the changes you're making to your software portfolio, it seems like in a way, you're simplifying or even converging some of your solutions. So as we think about the road map 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 even how should we think about the priorities around Distributed Cloud next year?

[François Locoh-Donou, executive]

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 our customers. So when you look at the priorities next year, of course, it's scaling the platform so it's available in more markets, in more environments and continue to add services to the platform. We have 2, I would say, first 2 sets of services, WAP 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 after the acquihire of Lilac a few months back, and we're starting to get customers adopting our CDN because it's convenient for them to attach that to low balancing and security in some cases. So the first priorities are 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 use F5 to front a bunch of applications for which they don't want to manage the life cycle of deployable products.

And if you look at the 500 customers or so that are on Distributed Cloud today, over 2/3 of them are actually existing BIG-IP customers. So about 1/3 of them are net new customers that have never bought anything from F5 and 2/3 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.

[Raymond McDonough, analyst]

I appreciate that. And if I could sneak 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.

[Francis Pelzer, executive]

Yes. Ray, as you described, I think that's roughly correct. Cash flow is one of the harder things for us to predict, but those dynamics, it should mirror a bit that net income growth with some exceptions to the true tax impacts, some of the restructuring expense we have last year that we don't have this year that are real cash but split out for non-GAAP purposes. So there's a few ins and outs, but it should be roughly close to that.

[Operator]

Our next question comes from the line of James Fish with Piper Sandler.

[James Fish, analyst]

I'll just like to get simple here. 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. Is the cross-sell that you're seeing? Or any qualitative or quantitative color around net retention rates, understanding you have this headwind around specifically the SaaS and MSP business of about $65 million. 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 piece?

[Francis Pelzer, executive]

Sure. Fish, why don't I start and if Francois wants to add anything, that would be great. So within our term subscription business, it's generally our BIG-IP software as well as NGINX, and that's the expansion rates that we have seen. It's not the easiest task in the world to convert that term into an ARR type of business because of all the moving parts. But when we try to do that and try to convert and look at what would an expansion rate 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 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, analyst]

Makes sense. And just on the go-to-market side, any changes in terms of incentives or approach as we turn the page into this next fiscal year and as we have transitions now within the overall software transition?

[Francis Pelzer, executive]

It's -- the incentive plans between the 2 years are largely the same, Fish. There's 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.

[Operator]

Our last question comes from the line of Simon Leopold with Raymond James.

[Simon Leopold, analyst]

Great. 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 sort of is this $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?

[Francis Pelzer, executive]

I'll start for the first one and then, Francois, I don't know if you want to take the second. But in terms of what we have said, I think, in both the prepared remarks and some of the answers, we do believe that we hit a trough in FY '23 in terms of systems bookings. And we're equating that to the term demand. Now the offset or the balance of that is that there was FY '22 bookings that 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 or a 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, we've got a federal government that isn't necessarily functional right now, and we'll see what that means is an impact to bookings for systems in Q1, and we're trying to take that into account as we looked at the guidance and the expectations.

We do expect, as we've talked about many times in the past, there is that 4- to 6-quarter low. And the dynamics that I just talked about explains why sometimes that takes 4 to 6 quarters, particularly in a supply chain or same environment. So we do expect at some point we're in a year that we will pick up in bookings from that Q4 level and return back to a higher level. I can't say normalized level because it's tough to know when exactly that will take place. But our outlook and our expectation is not that we are going to do $180 million less in systems bookings -- our systems revenue. Our bookings will improve, but the revenue will be down from last year because of that $180 million of headwind.

[François Locoh-Donou, executive]

And to the second part of your question. In terms of Silverline, no, it's not going to be all in one quarter. It's going to bleed off over the next couple of years, kind of every quarter. And it's going to be timed with when customers are at a point where they have to renew or migrate their subscription that there will be a decision point, and so you're going to see it, I think, over the next 6 to 8 quarters.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.