F5, Inc.
Q3 2021 Earnings Call Transcript

Published: 26 Jul 2021

[Operator:]

Good afternoon, and welcome to the F5 Network's Third Quarter Fiscal 2021 Financial Results Conference Call. 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:]

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 A copy of today's press release is available on our website at f5.com, where an archived version of today's call will be available through October 25, 2021.

[François Locoh-Donou:]

Thank you, Suzanne, and hello everyone. Thank you for joining us today. I am pleased to share with you our strong Q2 results. Broad based strength across the business drove 11% revenue growth in the quarter, marking our third sequential quarter of double-digit revenue growth. We delivered 34% software growth, 13% systems growth and 4% global services growth in Q3. F5’s business is benefiting from digital acceleration and application growth, as well as heightened demand for application security. Customers’ traditional apps are generating more revenue and more engagement than ever before. At the same time, customers also are accelerating adoption of modern application architectures like Kubernetes for new application. With our expanded application security and delivery portfolio, we are uniquely positioned to solve our customers’ most significant modern and traditional application challenges on-prem, in the cloud, and across multiple clouds. I will speak more about our business drivers and customer highlights from the quarter after Frank reviews our Q3 results and Q4 outlook. Frank?

[Frank Pelzer:]

Thank you, François, and good afternoon, everyone. As François just outlined, our team delivered another very strong quarter. Third quarter revenue of $652 million was up 11% year-over-year and above the top end of our guidance range. Please note, as I review our revenue mix, I will be referring to non-GAAP revenue measures for the year ago period.

[François Locoh-Donou:]

Thank you, Frank. Our very strong third quarter results demonstrated the powerful alignment of our expanded solution portfolio and our customers’ most important application needs. Across the board, our customers are massively accelerating digital transformation to keep up with current demand and forecasted growth and to meet consumers’ expectations for application performance and availability. But it is not just keeping up with application growth that is a challenge, customers are caught managing this robust growth across multiple infrastructures with applications in both traditional, monolithic 3Q architectures and in modern cloud-native and container-based architectures. F5 is uniquely fitted to solve customers’ traditional and modern application challenges. Our flexible, programmable BIG-IP portfolio secures and delivers traditional applications whether in a systems or software-based form factor on-premises and in the cloud. Meanwhile, our NGINX portfolio provides high performance application security and delivery for micro services in Kubernetes and container-based environment. And our shared security portfolio, we also bring industry-leading fraud and BOT protection against automated attacks. So let’s talk about five sustainable customer trends resulting from accelerating digital transformation and driving robust demand across our portfolio. Number one, Enterprise customers’ developers and DevOps teams are using NGINX to insert security earlier in the application lifecycle. NGINX with App Protect delivers robust application security for micro services with a flexibility and agility developers demand. And just one example, during Q3, we secured an NGINX win with an information services company that services high security customers in financial, Fintech, medical, insurance, and the U.S. Federal Government. The customer selected NGINX Plus with App Protect for its ability to deliver Layer 7 DDOS protection, reverse proxy and load balancing in a single unified solution. Trend number two. Heightened security concerns and high profile ransomware attacks are escalating demand for top-notch application security and fraud and abuse mitigation. With pronounced application growth and an ever expanding threat landscape, including high profile ransomware and credential stuffing attacks, we see growing demand for application security in cloud environments and rising demand for fraud and BOT defense.

[Operator:]

Your first question comes from the line of Tim Long from Barclays. Your line is now open.

[Tim Long:]

Two questions if I could guys. First, I am curious if you could just update us on kind of how the cloud vertical is going for you guys particularly on the software side but also curious if you – you continue to see some good hardware traction there as well. And then, second just wanted to follow-up on the subscription software business. Could you talk a little bit about kind of what you are seeing with true-ups and consumption, do you still continue to see accelerated usage for the offerings? And if so, what does that mean economically? And what does that mean as you look into newer contracts where you might be seeing higher consumption levels than you would have anticipated previously? Thank you.

[François Locoh-Donou:]

Hi, Tim, thanks for the questions. I will take the first part and then Frank will take the second part. So, let’s just talk about the cloud vertical. Generally, Tim, we continue to grow rapidly in public clouds driven by increased software consumption of our BIG-IP systems and also, rapidly growing consumption of NGINX in public cloud environment to scale Kubernetes specifically deployments into production. And the third factor there is the security factored in the public cloud continues to grow. So, that’s just how well we are doing in public cloud. But if you start back, I think, behind your question, I just want to go back to – if you look back to where we were three years ago, or four years ago when I joined F5, around the perfection of F5 is around public cloud, I would describe the bare thesis at the time as the following

[Frank Pelzer:]

Tim, in terms of the subscriptions we are seeing, our average in both in years two and years three we are happy where our internal planning was in the double-digits uplift that we see in years two and years three. Our utilization that we are seeing in the contract in year one is actually pulling in by a month in the last quarter and all of this gives us increased conviction in our software as we head into FY’22.

[Tim Long:]

Okay. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Samik Chatterjee from JP Morgan. Your line is now open.

[Samik Chatterjee:]

Hey guys. Thanks for the question. I had a couple, François, if I can start obviously from the software again here. One of the questions that we get quite often from investors and we got a lot of those this quarter is, even as you saw good acceleration in software revenue sequentially in the third quarter, there is a similar acceleration that’s implied into the fourth quarter and then kind of into next year. So, how much of that is just the momentum of the existing business relative to the true-ups or true forward, as well as subscription renewals that’s kind of influencing that if you can talk about the confidence into delivering that sequential improvement as we go along into next year? Thank you. And then I have a follow-up as well.

[François Locoh-Donou:]

Thank you, Samik. So, let me start on software. Yes, we are – as Frank just said, our conviction in our growth in software continues to increase and continues to get stronger for couple of reasons. The first is, we are indeed seeing very strong utilization of our multi-year subscription agreement getting better visibility through expansion and true forwards. And so far, what we are seeing on expansion true-forwards, and even our renewal that the performance of these aspects of our software business is well ahead of our own internal targets. So, that is an important part of our confidence. But the second part is, on our confidence is that, we also have some catalyst in our software business that are starting to play out as we thought they would and perhaps even better. If you look at NGINX, the momentum of adoption of NGINX is accelerating in part because we have a larger set of products and modules on NGINX from the investments we made a year-and-a-half ago. So, the Controller App Protect, the security piece on NGINX moving into API gateways, those are growing the addressable markets for NGINX and some of the catalysts played out and will play into 2022. We see growing demand for security including Shape and a lot of that is consumed in software. And BIG-IP is also growing in software as I said in public cloud and public cloud environment. So, if you combine all these, you answer that that we see a 5G opportunity that’s in software in 2022 for the 5G core. Those are all catalysts that we’ll continue to drive the growth that we expect to see in software.

[Samik Chatterjee:]

Got it. And then, just a follow-up, maybe this is more for Frank, but when you give initial guidance for this year, you were expecting more of a top-line growth of 7% to 8% and operating margins of 31% to 32% and clearly, top-line growth has exceeded your initial expectations, but when I look at the operating margin, you are toward the lower end of the range here. So, how should I think about that? Was it like reinvesting some of the incremental growth that you got? Or was it more of the headwinds because of the supply chain constraints just trying to think through why not more leverage on the operating margin as revenue exceeded expectations?

[Frank Pelzer:]

Sure. So, hey, Samik. A couple of factors that I will note. One is, obviously with the revenue outperformance we got natural commission expense and other things that go forwards higher expenses and what we would have otherwise modeled at the beginning of the year. We also obviously absorbed Volterra into this model where we said we are not going to change our operating plan but we were going to absorb those expenses and that’s exactly what we did. And then, just other gives and takes that put us I think more in the midpoint of that 31% to 32% range not at the low end from our expectation.

[Samik Chatterjee:]

Thank you. Thanks for taking the questions.

[Frank Pelzer:]

Sure.

[Operator:]

Thank you. Your next question comes from the line of Rod Hall of Goldman Sachs. Your line is now open.

[Rod Hall:]

Yes. Hi, guys. Thanks for the question. I wanted to just go back to the software revenue. I am assuming that you are guided software close to 35% growth this year. If I can put the 35% in and I get a deceleration of growth actually in Q4 round about $145 million of revenue and I guess quarter-on-quarter growth – seasonal growth a little bit slower. So I am just curious is that – does that makes sense to you guys? Are you expecting a slowdown in growth or the 35% if you will? I mean, can you just kind of help us square that all up and I have a follow-up.

[François Locoh-Donou:]

Hi, Rod. Well, we are not, as you know, we are not guiding hardware and software separately every quarter. We’ve said that we would drive about 35% software growth. For the year, we feel confident that we are going to do that. And more importantly, I always look at this as a overall trend for our software business. For Horizon 2, we said that our trend in our software growth would be 35% to 40% and we still feel that that’s what the range is going to be for growth for FY’21 and FY’22.

[Rod Hall:]

Okay.

[François Locoh-Donou:]

Rod, I think anything on that… sorry.

[Rod Hall:]

You go ahead.

[François Locoh-Donou:]

Yes, absolutely. I think the only thing I would add is, with the same methodology that we use and given guidance for the – since we’ve been talking about our software business, and the back half of the year when that was looking like a pretty good uplift when we were talking last quarter. I think we bridged that quite well this quarter and leaving ourselves obviously plenty of room on the 35% for the full year. And so, when we take a look, we take a look at the components that we know are coming in from the SaaS businesses, the true-forwards, and the pipeline activity of what we see.

[Rod Hall:]

Okay. And then, Frank, I had one for you too on deferred revenue. I was just looking at your long-term deferred increments versus your short-term. And I see a pretty good size in long-term deferred revenue increase in June over March and I was just curious, can you talk to us about the duration of the deferred revenue? And what specifically is driving the big increase in the long-term part of it? Thanks.

[Frank Pelzer:]

Sure. Absolutely right. So, it seems like we keep saying that that we had yet another record number of multi-year subscription agreements that bring in deferred revenue into that long-term bucket. Also we had a very strong Shape quarter, as well as other things that have got multi-year contracts. I believe the average duration on most of those was 2.5 to 3 years. And so, that’s what you are seeing growth in the long-term deferred revenue.

[Rod Hall:]

Great. Okay. Thanks a lot. I appreciate you guys.

[Frank Pelzer:]

Thank you, Rod.

[Operator:]

Thank you. Your next question comes from the line of James Fish from Piper Sandler. Your line is now open.

[James Fish:]

Hey guys. Great quarter. Not to go back to the topic, but on the subscription side first, I guess, how should we think about kind of next year’s true-up in renewal opportunity understanding that fiscal’19 base is bigger than the fiscal’18 base. But we are having some of these true-ups come in this fiscal year. I guess, can you kind of help us bridge the transition tier of how we should think about this true-up in renewal activity happening? And then, it sounds like we should think about it as kind of the 1.10, 1.20 kind of net retention rate. Is that the right way to think about it?

[Frank Pelzer:]

Yes, it’s the right way to think about it. And there is also an additional component with 606. So, the reason why that lapping is important than what you see in 2019 as opposed to the previous quarters and why I have said for the past probably six or seven quarters that in the back half of FY’22 is going to be interesting and when things start to look more consistent and the revenue growth is that, once you actually sign those new term subscription agreements, there is a whole new revenue recognition component associated with that. And so the true-forwards are interesting. But that becomes the new baseline in which the new deal is signed. And then, in those three year agreement, 63% of that comes to product in the quarter that it is signed and the balance of that is ratably deferred into the services revenue bucket over the course of that three years. And then, the true-forwards obviously have got an additive component to the product revenue in years two and years three. But that lapping year is actually when you see more pick up in the product revenue on the software side.

[James Fish:]

Makes sense, Frank. And it does look like your bookings and billings were up very nicely here 25%, not a metric we typically talk about with you guys, but as the software piece is becoming a bigger and bigger piece that makes consensus part two. First, are you guys planning on introducing any new metrics here as we think about fiscal’22 an ARR metric or talking more to billings and then, secondly, on that billing strength this quarter, was it more on the product side or was it just really strong maintenance attached to these virtual BIG-IP and NGINX licenses? Thanks guys.

[Frank Pelzer:]

Yes, I’ll speak to the metrics question and let François take the back half. We continued to evaluate additional disclosures of metrics. I can’t make any promises of when that’s going to come. But we continue to think about what’s going to be the most stronger for the uses of our financial statements.

[François Locoh-Donou:]

And then, Jim, on the second part where the traction is coming from, there are two areas that I would point to you that’s driving this increase in subscription revenues. One is security. We had a very strong quarter with Shape and in certain verticals, retail, financial services, the tech verticals, online gaming where we are – the customers have a heightened sense of the fact environment and awareness of the fact vectors and we are able to mitigate a lot of automated effects. But not just mitigate Bot attacks but also more – it increasingly full filed that our traffic more intelligently leveraging Shape’s AI technology, which resulted in improved customer experience. And so, it’s making us really sticky in these environments and in these verticals. The second thing in security is, we are seeing SecOps teams and DevOps teams increasingly wanting to deploy security earlier in the lifecycle of an application. And that points to the security capabilities or a size that we ported on NGINX. And so we think NGINX security start driving growth in our security portfolio. And since both Shape and NGINX are driving subscription-based revenue, you are seeing that increase there. Then the second area I would point to is just more general adoption of modern application. One of the things that we are seeing over the last six months and I think it’s accelerated this quarter is, Kubernetes is going into production. A lot of customers have done development and test with the micro services container-based applications and they are now looking to scale these applications. In a lot of cases, they are running into trouble and NGINX has all the capabilities to help them scale their Kubernetes clusters and it’s driving an acceleration in NGINX adoption in addition to the fact that NGINX now has multiple products controller, API gateway, et cetera. So, when you look at these factors, it’s accelerating adoption in NGINX. One of the – I think the most obvious manifestations of this is, we have very strong momentum with NGINX, not in just any customer, but in our top 1,000 customers, the penetration of NGINX is growing and very strong. In fact, just this quarter, if you look at – Frank said, we had a record number of multi-year subscription agreements and NGINX was part of more than half of those multi-year subscription agreements for the first time. So, it points both to the growth we are seeing with NGINX and Shape, but it also points to what I said earlier around the powerful alignment of our portfolio to the hybrid challenges that our customers face.

[James Fish:]

Thanks, guys.

[Francois Locoh-Donou:]

Thanks, Jim.

[Operator:]

Thank you. Your next question comes from the line of Meta Marshall of Morgan Stanley. Your line is now open.

[Meta Marshall:]

Great. Thanks. A couple of questions. You've mentioned a couple of times you had a record quarter with Shape Security. Last quarter, you mentioned there have been some delays in proof-of-concept. So just wanted to get a sense of, is some of that strength of proof-of-concept is resuming? Is it kind of the security breaches that we've seen that have driven some of that strength? And then, maybe just a second question, maybe for Frank is, kind of the SaaS application or cloud customer vertical, something that we should consider as being more than 10% of the business at this point? Or just any anything that would give us a sense of the size of that customer base at this point. Thanks.

[Francois Locoh-Donou:]

So, Meta, let me start with Shape. So, last quarter, we did mention we had some proof-of-concepts that were taking a long time and that was exacerbated by the fact that customers are not in the office. And so, are pulling off this proof-of-concept and reducing the length of the sales cycle was difficult. We still have that issue. And I would say, for customers that are not under any kind of immediate significant pain and can take their time to make their decision. That is still a factor and we hope that factor succeeds in the coming quarters, but it's still there. On the other hand, we also have a number of customers who are either under attack and need an immediate solution and oftentimes the solution they have in place are not effective enough for sophisticated attacks. Or they have a heightened sense that they are on borrowed time and need to put in place the most effective mitigation possible and for those types of customers the sales cycle is pretty rapid. And in this quarter, we had more of these customers come to us. I would say there is also a maturing of the go-to-market, with teams being able to identify the verticals where this is mostly the case and focus their efforts. So, that's why the traction on Shape is accelerating. And then on your second part, Meta, on the cloud vertical, we don't break it down on sort of on the quarterly basis in terms of quantifying exactly how much that is. But, here is what I would say. When we look at where F5 is growing the fastest at the moment. If you take all companies that are either are in technology or in ecommerce or whose products are digital services. So it would include all the cloud providers, then the SaaS providers. If you put all of these in a bucket, this is the area of the business for F5 that is growing the fastest at the moment and it's implicit why that because all digital services are growing rapidly and the consumption of these services are growing rapidly. And that's driving growth for us across our entire portfolio Shape, NGINX and BIG-IP are all benefiting from that. And I would note that it's an interesting trend, because again if you go back four years ago where you would have thought that the tech companies who are perhaps the most aggressive at moving to the cloud, adopting cloud-native and container-enabled architectures would not be the customers that would stay on BIG-IP appliances and where you would have expected perhaps F5’s momentum to be less in the future. It's the complete opposite now where our momentum in that sort of vertical is very strong.

[Meta Marshall:]

Great. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Alex Henderson from Needham. Your line is now open.

[Alex Henderson:]

Great. Thanks. And I think you pretty clearly proven that you guys are a real play on the transition to the cloud with these quarters. I wanted to get into a couple of the items here. The first one is the conversion rate of NGINX to NGINX Plus. It's just pretty clear that since your acquisition of NGINX, that the percentage of – or the market share percent of NGINX has definitely gone up. I understand it's up in the 67% plus range now, up from like 60%. And on voice share has gone from over 20% to low teens. So, clearly demonstrating that it's becoming the de facto standard. But can you talk about the conversion rate of NGINX to NGINX Plus and how that impacts your business? And the second piece of that same question is, if you've got a 5% increase in your subscription rate in the quarter in software, I think the standard kind of rule of thumb is around 2.2 times impact on the rate of growth as you convert from perpetual to software subscriptions. So, if it’s up 5%, does that mean it understated your growth in the true underlying growth rate by roughly 10% to 12%? Thanks.

[Francois Locoh-Donou:]

Hey, Alex. I'll take the first part and Frank will take the second part. In terms of conversion of NGINX to NGINX Plus, so, as you noted, Alex, NGINX is getting a lot of traction. It’s now the most deployed web server in the world with north of 500 million websites using the technology. And so, yes, an important motion with NGINX is the conversion to NGINX Plus. We have steadily gotten better about that in two ways. Number one is, because there is a broader set of products that can be offered either as part of NGINX Plus or in conjunction with NGINX Plus, the security capabilities, the API Gateway and now a controller that makes it much easier to deploy and manage these instances. There are more reasons for customers using opensource to want to have access to the commercial capability. And then, the second part is, what we have found out is, number of large enterprises, customers are not aware of how many opensource instances they have, how many versions they have, and/or they underestimate by sometimes a factor of 10 x the number of NGINX open source instances we have. And so, we've been able to bring to them a new technology, we call it an NGINX Instance Manager that allows them to discover the opensource instances that they have. And oftentimes prompts them to look at that portfolio and ensure that it has the right support and oftentimes into NGINX Plus to have other access to better features and better versions. So, that's kind of the - what we are seeing in terms of better conversion rates on NGINX. But I would say, we are also getting Greenfield deployments with folks who did not have NGINX opensource in their portfolio. Because as I said before, scaling these Kubernetes clusters and scaling these container-based applications is a challenge for many customers and what they find is NGINX is a platform that consolidate a lot of functionalities into one platform. And so, they don't have to deal with five or seven different vendors for different capabilities. So, all of that is why we are seeing that traction.

[Frank Pelzer:]

Alex, and then, for the second part of your question, I would love that apps to work for all of our software bases, it does actually for the SaaS ratable piece of our software base. But with the adoption of 606 for our term subscription based model that one evens out a bit closer to the perpetual and subscription revenue recognition. And so, that has – your math does work as that SaaS portion of our revenue continues to grow and the ratably recognized portion. But it's not completely apples-to-apples for all of those .

[Alex Henderson:]

Okay. And if I could just follow-up one last quick question. So, clearly as the dominant player in Kubernetes code as infrastructure, could you talk a little bit about your ability to hook into HashiCorp and to what extent your tight integration with HashiCorp is driving your adoption rates? Clearly, they are setting up to come public and as they do, code as infrastructure, CICD pipelining and obviously there is the role of Kubernetes goes to center stage and you are obviously a critical piece of that?

[Kara Sprague:]

Yes, I would say. It’s Kara.

[Alex Henderson:]

Hi, Kara.

[Alex Henderson:]

I knew I get and there is some out.

[Kara Sprague:]

We have hooks from a number of our products into Hashi's portfolio and we do have a strong, strong – we see customers looking for our integrations that are built into their. So for example, a few integrations from BIG-IP and the console that enable deployments and provisioning of BIG-IP resources through Hashi's console offering, as well as other integrations that we have. But I would say that Hashi is but one example of a broad set of automation and orchestration capabilities that we've enabled across our portfolio. So, both NGINX and BIG-IP can be automated and provisioned and configured via a set of declarative APIs and our customers use that through Hashi. They use it through things like Ansible, TerraForm, as well as the number of other automation technologies.

[Operator:]

Excuse me. Your next question comes from the line of Fahad Najam from MKM Partners. Your line is now open.

[Fahad Najam:]

Thank you for taking my question. I guess, I had a very high-level question on your subscription revenue. The disclosed number that you have 73% of it being subscription. Can you give us a sense of how much it was from SaaS revenue? Was there any term revenue, a term software?

[Frank Pelzer:]

Fahad, it’s Frank. It was 78% this quarter, 73% the year ago quarter and we don't split out those components at this point. But I do appreciate the question.

[Fahad Najam:]

Okay. If I could, maybe ask kind of figuring out in terms of the opportunity you had in software growth. Can you help us understand in terms of the true-ups on land and expand nature of your business? Can you give us some or share some data points, quantifiable data points that kind of show you landing and expanding on yourself, called customers who adopted your set of solutions, but as and then expands along with F5s traditional software solutions. Just kind of understanding how much of a true-up are you enjoying as you integrate more of Shape and Volterra solutions going forward?

[Francois Locoh-Donou:]

Fahad, I don't know if I will get to what I think you want, which is an average of the true-ups or expansion that we are seeing at renewal with our customers. But let me just give you a few data points. So first of all, our subscription offers really started in earnest in 2019. And so, we are in the very early stages of going through these certainly the renewal of the multi-year subscriptions that now expired and gone to three years. In terms of the ones that have gone through one year and so we've already had a chance to do the true-up. We are generally seeing expansion in consumption that is very healthy. So we are very happy about that. One of the things, Fahad, that we have worked on and I think now we're getting to a very good position is, in the first year it used to take a long time for customers get to get to 400% utilization of what they had committed to. I think the first sort of deals we did, it took north of 20 months for customers to get to that. We have steadily brought that down to now customers in roughly five months or so get to 400% utilization of their subscription and so beyond then they expand. So we are gaining very healthy consumption and as a result very healthy true-ups. Renewals, it's early days. But I can tell you, we have had some renewals where we were close to 3x what they had committed two of the - in the first multi-year subscription. Of course, not all of them are that way. But it's just to give you a range of what we see there. So, those are some of the things that give us good – better visibility into next year and good confidence and continued growth.

[Fahad Najam:]

Thank you so much.

[Operator:]

Thank you. Your next question comes from the line of Amit Daryanani from Evercore. Your line is now open.

[Amit Daryanani:]

Perfect. Thanks for taking my question. I guess, I have two as well. First off, I just want to just touching on systems growth and what you've seen so far it sounds to be much better than the Horizon 2 all the long-term target. So, remind us what is driving that growth? And should we think what this means for Horizon 2 growth for the systems segment?

[Francois Locoh-Donou:]

Yes. Amit, the - what's driving the systems growth, I think, there are few micro factors in the sense that I think the IT spending environment right now is fairly healthy. And there is also a lot of consumption of digital services by consumers and that in turn is fueling growth in application, so, growth in demand for application. I would say that is kind of the biggest micro factor, because what we see is a lot of our customers when they are refreshing their appliances, they don't go just for a refresh, they go for refresh and capacity expansion. And sometimes it's capacity expansion and transformation because they want to move in a private cloud environment. And that's driven by there just more traffic and more usage of it even they are traditional applications. We see, as I said earlier, growth with digital and SaaS service providers and for them the growth comes from – they are sometimes their services, the demand for their services, whether it's collaboration platforms or ecommerce platforms or even SaaS providers, the demand for their services are growing rapidly and we are built into their infrastructure. And so that drives demand for our hardware, our systems into their infrastructure. And I would say, generally, there is also a fundamental change in stance, Amit, from go back three, four years ago, I would regularly hear from customers four years ago, look we don't want to buy more hardware, because we're going to move everything to the cloud. We are going to be out of our datacenters. We've got to figure out our architecture and at the time we said there was a pause because people were thinking their architecture. There is not a single CIO that has told me this in the last twelve months. Every one of them – I think a lot of people have learned from the first implementations in public cloud, sometimes the cost and time associated with refactoring applications. And generally, I think people are more comfortable that they are going to be in a hybrid environment for a very, very long time to come. It's not forever. And so they are comfortable growing their on-prem presence with hardware where it makes sense and leveraging the public cloud for other initiatives. And I think that that halo, that environment is very different than it was four years ago. And then, the last factor that has an impact on our systems business, Amit, is security. I said earlier that we had very strong growth in SaaS security with Shape subscription, security with NGINX. But we also have very healthy double-digit growth in hardware security and that's because the – all of these apps need to be secured and customers are aware of the risks. So they are moving forward with application security.

[Amit Daryanani:]

Got it. That is truly helpful. And if I could just maybe ask you to clarify a little bit more for me. I think a lot of folks tend to think that if the software business grows 35%, systems has to be planned. It’s a bit of a either or math sometimes for people. Is it fair to say given what you just outlined with hybrid being the reality that you could have systems growth and software growth be more durable over time versus not?

[Francois Locoh-Donou:]

Yes. It’s the - potentially a possible scenario. I would separate though, when you look at our software business, you've got NGINX and Shape. And I don't think there is any relationship between the growth of that part of our software portfolio and the growth in hardware. When you look at BIG-IP per se, this is where we have seen and we try to continue to see some customers that we would have expected to have moved to software form factor right now that are delaying or reconsidering in part because of COVID, in part because of the immediate demand that they see on their application. So that's where there is a – I would say there is some level of give and get on hardware and software. But overall, the software transition for us is absolutely accretive to the business and right now the drivers that we are seeing in our hardware business, we feel there are couple of one-offs that we talked about last time around our EOSB of seven products. But I would say the majority of the drivers we're seeing right now are pretty sustainable.

[Amit Daryanani:]

Perfect. Thank you. Congrats on a nice quarter.

[Francois Locoh-Donou:]

Thank you.

[Operator:]

Thank you. Due to time constraints, we will take our last question today from Simon Leopold of Raymond James. Your line is now open.

[Simon Leopold:]

Great. Thank you for taking the question. I wanted to see if you can talk a little bit from a market vertical perspective. In particular, federal was low for you guys this quarter at 4% of revenue and were coming into what's normally your strong seasonal federal quarter. So I want to understand whether there is something different in the current cycle in terms of your federal business? Or whether we should expect federal to be strong in your September quarter? And then on Enterprises, if there is a way you could maybe characterize where we are in terms of kind of a post-pandemic recovery, is there some aspect to the current business that we may be could characterize as catch-up spend compared to the weaker spending we saw a year ago due to the pandemic? Thank you.

[Francois Locoh-Donou:]

Simon, thank you for the questions. So, let me start with the Fed, the Fed question. There is anything – there is nothing particular for this quarter in terms of our bookings. They were there were in the range of what we typically expected in the quarter like this for the Fed. We do expect a strong seasonal quarter in the Fed in our fourth fiscal quarter and we continue to be well placed to win some business there. There is, as you know, a lot of additional focus on security in that vertical and we are well placed to win and protect against some of the threats that we are seeing for our government customers. So, I think that's where our focus is with the Fed and that will continue. As it relates to your question on the Enterprise, Simon, remind me, is the question is are we going to see the same drivers?

[Simon Leopold:]

Well, I guess, what I am trying to get at is, is there some element of the growth you are seeing now that goes away that is more about the cycle as opposed to the longer-term secular trend. I am trying to really discern between the two. So you've got a relatively easy comparison with we get it, datacenter spending a year ago. And so, at some point than may be a year that peters out. So there is a cyclical aspect and a secular aspect of your business. I am trying to discern the two.

[Francois Locoh-Donou:]

Okay. Well, Simon, it's a great question and I think specifically, in our hardware business, I think the elements of folks. And you are asking me which one is the 80

[Simon Leopold:]

Okay. Thank you.

[Operator:]

Thank you. And this concludes today’s conference call. Thank you for participating. You may now disconnect.