F5 Networks, inc (FFIV) Q4 2021 Earnings Call Transcript – Motley Fool

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F5 Networks, inc (NASDAQ:FFIV)
Q4 2021 Earnings Call
Oct 26, 2021, 4:30 p.m. ET
Operator
Good afternoon and welcome to the F5 Fourth Quarter Fiscal 2021 Financial Results Conference Call. [Operator Instructions] After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]
I will now turn the call over to Ms. Suzanne DuLong. Ma’am, you may begin.

Suzanne DuLongVice President of Investor Relations
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A copy of today’s press release is available on our website at f5.com where an archived version of today’s call will be available through January 25, 2022. Today’s live discussion is supported by slides which are viewable on the webcast and will be posted to our IR site at the conclusion of today’s discussion. To access the replay of today’s call by phone dial 800 585 8367 or 416-621-4642 and use meeting ID 6879935. A telephonic replay of this call will be available through midnight Pacific Time October 27th. For additional information or follow-up questions please reach out to me directly at [email protected]
Our discussion today will contain forward-looking statements which include words such as belief, 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. Factors that may affect our results are summarized in the press release announcing our financial results and described in detail in our SEC filings. 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.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Thank you, Suzanne, and hello everyone. Thank you for joining us today. On the pandemic conditions that have persisted far longer than anyone initially expected, the F5 team delivered another very strong quarter closing out a robust year for us. Customer demand for application, security and delivery, the mid skyrocketing application growth and heightened application security awareness are driving strong demand for F5 solution. This demand span our portfolio and our regional theaters in Q4, driving 11% revenue growth and our fourth consecutive quarter of double-digit revenue growth. We delivered 35% software growth, 12% systems growth, and 2% global services growth in the quarter.
With software revenue representing 45% of product revenue in the quarter and 80% of our software coming from subscriptions, we continue to market milestone after milestone in our rapid transformation to a more software-led business. I will speak more about our business drivers and customer highlights from the quarter after Frank reviews our Q4 and FY ’21 results and our outlook for Q1 and FY ’22. Frank?
Frank PelzerExecutive Vice President and Chief Financial Officer
Thank you, Francois, and good afternoon everyone. I’ll review our Q4 results before briefly recapping our fiscal year results. As Francois just outlined, our team delivered another very strong quarter. Fourth quarter revenue of $682 million is 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. Q4 product revenue of $340 million is up 21% year-over-year, representing a significant acceleration from 6% in the same period last year.
Q4 software revenue grew 35% to $152 million representing 45% of product revenue, up from 40% in the year-ago period. Systems revenue of $108 million is up 12% compared to Q4 last year when systems were down 8%. Rounding out the revenue picture, we continue to see strength from our global services at $342 million in Q4, up 2% compared to last year and representing 50% of revenue.
Taking a closer look at our software revenue, customers’ preference for subscription-based consumption models is evident. In Q4 ’21, subscription-based revenue represented 80% of total software revenue, up from 76% in the year-ago period. Subscription-based revenue includes our ratably recognized as a service offerings and our solutions sold as term-based licenses.
Within subscriptions, customer demand is driving substantial volume and value growth from our multi-year subscriptions. The deal volume of our multi-year subscriptions more than doubled year-over-year and is approaching 500 in total. This consumption model offers flexibility for the customer and through the annual true-forward and normal renewal cycles — offers us visibility to customers’ utilization and consumption patterns. In addition, we ended the year with more than 600 SaaS and managed service customers reflecting growth of 50% year-over-year.
Revenue from recurring sources, which includes term subscriptions as a service and utility-based revenue as well as the maintenance portion of our services revenue totaled 67% of revenue in the quarter. On a regional basis in Q4, Americas delivered 11% revenue growth year-over-year representing 59% of total revenue. EMEA delivered 11% growth, representing 24% of revenue and APAC delivered 9% growth, accounting for 17% of revenue.
The strength in Q4 spanned customer verticals as well. Enterprise customers represented 69% of product bookings in the quarter. Service providers represented 13% and government customers represented 18% including 8% from U.S. Federal.
I will now share our Q4 operating results. GAAP gross margin in Q4 was 81.1%. Non-GAAP gross margin was 83.7%. GAAP operating expenses were $427 million. Non-GAAP operating expenses were $350 million. Our GAAP operating margin in Q4 was 18.5%. Non-GAAP operating margin was 32.4%. Our GAAP effective tax rate for the quarter was 10.3%. Our non-GAAP effective tax rate was 15%. GAAP net income for the quarter was $111 million or $1.80 per share. Non-GAAP net income was $185 million or $3.01 per share.
I will now turn to the balance sheet. We generated $197 million in cash flow from operations in Q4. Cash and investments totaled approximately $1.04 billion at quarter-end. DSO was 45 days and capital expenditures for the quarter were $7 million. Deferred revenue increased 17% year-over-year to $1.489 billion up from $1.273 billion. The growth in total deferred was largely driven by subscription and SaaS bookings growth and to a lesser extent deferred service maintenance.
Finally, we ended the quarter with approximately 6,460 employees, up approximately 80 from Q3. This does not include approximately 90 employees added with the Threat Stack acquisition, which closed in our fiscal first quarter of 2022.
I will now briefly recap our full year 2021 results. For the year, revenue grew 10% to $2.6 billion. Product revenue of $1.25 billion grew 21% from the prior year and accounted for 48% of total revenue, up from 44% in the year-ago period. Within product revenue, software grew 37% to $500 million, a beat on our outlook for at or about 35% growth for the year. Systems revenue in FY ’21 grew 12% to $748 million. Global services grew 2% to $1.36 billion representing 52% of total revenue.
Looking more closely at our software revenue. Since fiscal 2018, we’ve grown our software revenue at a 49% compounded annual growth rate and our software subscription revenue at 115% compounded annual growth rate. GAAP gross margin in FY ’21 was 81.1%. Non-GAAP gross margin was 83.9%. Our GAAP operating margin in FY ’21 was 15.1% and our non-GAAP operating margin was 31.6%. Our GAAP effective tax rate for the year was 14.4%. Our non-GAAP effective tax rate for the year was 17.7%. GAAP net income for FY ’21 was $331 million or $5.34 per share. Non-GAAP net income was $671 million or $10.81 per share.
Application security is a big and growing reason customers turn to F5. Our application security offerings including DDoS protection, advanced vulnerability defense for web application firewall, and bot fraud and abuse protections are increasingly recognized as industry-leading. As a result, we estimate our stand-alone security product revenue grew 26% in FY ’21 to approximately $350 million, reflecting a 38% compounded annual growth rate since FY ’18.
Including bundled security offerings and then estimate for our services revenue associated with security, we estimated a total application security portion of our business grew to more than $900 million in FY ’21, representing approximately 35% of total revenue.
Supply chain challenges have been well acknowledged across the industry over the last year. Our supply chain team continues to do an impressive job managing global supply chain constraints and working through our supplier ecosystem to manage through challenging conditions. At this point, like many others, we are working with extended lead times. In part as a result of supply chain constraints, we ended FY ’21 with approximately $125 million in backlog, the vast majority of which is system-based.
Now, let me share our guidance for our first quarter as well as some color on our view for FY ’22. Unless otherwise stated, please note that my guidance comments reference non-GAAP metrics. Let me start with sharing our expectations for the first quarter of 2022. We are targeting Q1 revenue in the range of $665 million to $685 million implying roughly 8% growth at the midpoint. We expect Q1 ’22 gross margins of approximately 84%. We estimate operating expenses of $342 million to $354 million. Our Q1 earnings target is $2.71 to $2.83 per share, with a share count of approximately 62 million. We expect Q1 share-based compensation expense of approximately 64 to 66 million.
Now, let me share some operating expectations for our 2022 fiscal year. For the year, we expect revenue growth of 8% to 9%. We expect software growth of between 35% and 40%. We expect to the range of software variability, we will see quarter-to-quarter, we’ll narrow relative to what we have experienced in the past. This is due in part to what we expect will be a higher contribution from ratable revenue over time and also in part due to increased scale of our software business overall.
We expect systems revenue growth will be flat to slightly up for the year. And we continue to expect low single-digit global services revenue growth. I note that all of these revenue expectations are at or above our most recent Horizon 2 outlook provided in January with the Volterra acquisition announcement. We anticipate continued pressures related to our global supply chain in the next several quarters. We expect these pressures will result in some increased costs related to the expedite fees and sourcing of long lead-time components. In light of this dynamic, we anticipate non-GAAP gross margins of approximately 83.5% to 84% for the year, and we will continue to closely monitor this situation as we have throughout the past year.
We continue to target operating on the Rule of 40 basis, where the combination of our revenue growth and non-GAAP operating margins total 40. The combination of our strong FY ’21 revenue growth and our continued operating discipline enabled us to achieve the Rule 40 in four out of four quarters in FY ’21 ahead of our initial Horizon 2 target. We continue to target achieving the Rule of 40 in FY ’22.
Given our anticipated revenue growth and the ongoing benefits from the cost reduction initiatives that we discussed at our Analyst and Investor Meeting last year, we expect non-GAAP operating margin in the range of 32% to 33% for FY ’22. We expect our typical operating margin seasonality, which translates to operating margins stepping down in Q2 and improving in the back half of the year. We anticipate our full fiscal year of effective tax rate will be at around 21%, with some fluctuations quarter-to-quarter. This estimate does not account for any potential future federal tax changes.
We expect fiscal 2022 stock-based compensation expense in the range of $250 million to $270 million and capital expenditures in the range of $40 million to $60 million. Finally, for the year, we expect share count to remain at approximately 62 million shares inclusive of the expected share repurchase of $500 million during FY ’22 as we previously discussed.
With that, I will turn the call back to Francois. Francois?
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Thank you, Frank. Our very strong fourth quarter results are the perfect cap to our robust outperformance in FY ’21. In the last 18 months, our reliance on application both as businesses and as consumers has escalated sharply and likely forever changed. Our customers are massively accelerating digital transformation to keep up with current demand and forecasted growth. They are doing this while also working to consistently meet consumers’ high expectations for application performance and availability, and while also ensuring their application and the consumers data are secure.
In my conversation with investors, I am often asked what is potentially misunderstood about F5? Let me address the key points here. First, traditional on-premise applications continue to grow counter to the prevailing expectations from two to three years ago. In fact, traditional apps are generating more traffic and more revenue than ever because every aspect of life and business relies on applications. For F5, this means BIG-IP demand will continue to grow in both software and systems form factors.
Second, contrary to early cloud hype, the vast majority of traditional applications are not being refactored. They are either remaining on-premise or they are moving to the cloud with a lift and shift motion. In other words, F5 run applications are remaining attached to F5. As a result, BIG-IP is growing both on-premise and in public clouds.
Third, modern container-based applications continue to grow at a rapid pace, and not only for new applications. Customers are bolting new modern components onto traditional applications to improve the user experience. In many cases, Cloud Native application security and delivery simply are not robust enough to meet the application’s needs. For F5 this means accelerating NGINX demand, enabling app security and scale for modern application often as a complement to BIG-IP.
And finally, given the volume of business and data that is now flowing through application, and the increasingly distributed nature of applications, application security has taken on new significance where in the past, network and infrastructure security was a focus for customers and vendors alike. We expect application security will be one of the hottest areas of investment over the next decade.
F5 is one of the few players 100% focused on application security and we protect not just access to applications, but also how they are used. As a result, we expect our role and reputation as a leading application security provider will accelerate. To sum up these points, F5 is differentiated and well-positioned to benefit from significant emerging secular trend. There are some companies focused on applications. There also are some focused on application security. F5 is the only one that is at the epicenter of these two secular forces with a focused, expertise and the technology assets to secure and deliver any application anywhere. That’s grown our opportunity in real customer trends and use cases. Last quarter, I talked about five sustainable customer trends we expected to drive demand across our portfolio. Let’s revisit those trends with some customer examples from Q4.
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 microservices with the flexibility and agility developers demand. In one example during Q4, we secured an NGINX win with a global insurance group. They are migrating their consumer-facing insurance services into a public cloud. For risk mitigation and security reasons, they required a scalable and container-friendly solution. They also needed enterprise-grade security capable of protecting their strategic high-value apps and guaranteeing risk management compliance. And they wanted all of this within a lightweight footprint that could drive automation, saving time and money. NGINX with App Protect was the natural choice.
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 potential stuffing attacks, we see growing demand for application security in cloud environment and rising demand for fraud and bot defense. During Q4, a North American electric utility experienced a credential stuffing attack resulting in substantial infrastructure failure. More than 6 million customers had to reset their account passwords. Based on their experience of the BIG-IP customer, the utility turned to F5 for help. Shape was emergency onboarded, identified high volumes of automated traffic and deployed highly effective mitigation measures to stop the attack.
Trend number 3, customers are leveraging F5 for Kubernetes, containers, and cloud-native architectures. Our growth in modern application continues to accelerate driven by NGINX Kubernetes and cloud-native deployments. We are seeing several top use cases emerge for NGINX including managing API, optimizing Kubernetes traffic management and load balancing cloud-native and hybrid cloud application. With customers modern applications experiencing significant and constant swings in user demand, they need infrastructure that scales up automatically to meet user demands or down to save cloud costs. During Q4, the Canadian online investment manager selected NGINX to move their Kubernetes-based application into production at scale. Initially, they attempted to use a competitive solution, but it lacked performance and did not integrate well with the HashiCorp console or with AWS autoscaling. NGINX Plus delivered low latency and high uptime to improve user experience and integrated seamlessly with AWS autoscaling to spin down half of their instances during off-peak traffic demand.
Trend number four. Customers are scaling their existing hardware-based infrastructures to handle accelerating application growth, driving continued strength for BIG-IP systems. We are finding that customers are often looking to scale both their existing infrastructure and their modern apps infrastructure simultaneously. This is particularly true among stack and SaaS provider customers who continue to experience rapid adoption and growth of their digital products and services.
In the latest of a growing list of examples, during Q4, a high growth SaaS provider selected F5 to help them scale both the traditional apps on BIG-IP and their modern public cloud apps with NGINX. This deal was made sweeter by the fact that NGINX displaced the competitor that wasn’t performing as promised.
Finally, trend number five. Customers are leveraging BIG-IP for transformation including cloud migration and automation initiatives. The demand we are seeing for BIG-IP systems and software is about more than just capacity additions. Customers also are using BIG-IP to drive transformation often combining it with NGINX. F5 is particularly well suited for enterprises that operate both modern and traditional applications, which most do. NGINX integrations with BIG-IP provide differentiation over competitor and cloud-native offering and we will extend this with integrations into Volterra at the edge.
During Q4, the BIG-IP and NGINX combination was selected by one of the largest online betting companies in Asia Pacific. The customer who processes more than $1 billion annual transaction needed hybrid on-premise’s data security as well as the ability to support modern app development and new engaging multimedia capability. They selected BIG-IP and NGINX as the foundation for their digital transformation. Let me touch briefly on service providers and our Volterra integration progress before concluding our prepared remarks.
We had a good year with service providers in FY ’21. While it’s true that several of the trends I have just described also apply to our service provider customers, they also face unique challenges as a result of 4G to 5G migration and growing 5G traffic demands. Thus far, our service provider demand has come largely from 4G core network upgrades as they expand hardware capacity and upgrade existing infrastructures to handle 5G traffic. We expect software use cases will begin to emerge as carriers virtualize their 5G course.
Looking forward, our Volterra platform is generating significant interest from service provider. They view it as a way to insert their capabilities at the edge thus creating 5G in a box offerings.
That offers a good transition to discussing progress on the integration of Volterra. Volterra is a universal edge platform, which will enable us to insert critical application services at the edge and allow our customers to consume the services in a SaaS format. Our initial priority is on security offerings. We have one of the best, if not the best application security software stacks in the industry, including our Web Application Firewall, our DDoS protection, API security, and WAF capabilities. We are taking that entire security stack and integrating it natively into the Volterra platform.
Our first priority is a SaaS security offering that will address the shift toward modern web apps and API, and we are on track to deliver within our committed 12 to 18 months integration window. Our recent acquisition of Threat Stack, a leader in cloud security and workload protection is designed to accelerate our SaaS security offerings with cloud endpoint telemetry and analytics for better detection and response. Threat Stack also augments our telemetry and virtual security and technology expertise and I want to take this opportunity to once again welcome the entire Threat Stack team to F5.
In closing, we are more confident than ever in our vision and in our ability to continue to execute. The combination of application growth, our expanded solutions platform, our continuously evolving go-to-market strategy and our vision for the future of adaptive applications is resonating with customers and puts us at the epicenter of several emerging strong secular trends. I extend my heartfelt thanks to the entire F5 team for their steadfast focus and execution. As a team, we have accomplished more faster than anyone, even us, thought we could. We’ve got more work ahead, but I am more confident than ever in our ability to achieve our goals. My thanks to our customers and partners for being on our journey with us and providing guidance and support along the way.
With that, operator, we will open the call to Q&A.
Operator
[Operator Instructions] Your first question comes from Sami Badri with Credit Suisse. Your line is open.
Sami BadriCredit Suisse — Analyst
Thank you for giving me your question and you’ve given us quite a bit to talk about on this conference call. I want to shoot the first question over to Frank, and I want to talk about the backlog and the backlog composition. And you mentioned the majority of systems — system-based backlog, but I wanted to break down the customer mix of that backlog. If you could just tell us a little bit more about what’s going on there?
Frank PelzerExecutive Vice President and Chief Financial Officer
Yeah. I mean I don’t have a lot more to add. I will say that the — at the end of the year effectively, we just saw a continued increase in the backlog build more so than we could ship. In the end of Q4, a lot of service provider, customers, probably fall into that realm. But having said that it’s — that was the $125 million that we referenced and almost all of it is systems.
Sami BadriCredit Suisse — Analyst
Got it, got it. And then, Francois, just kind of shifting over to you. I want to talk about the U.S. federal segment and how that made up about 8% of total revenue mix. Are you expecting elevated levels of U.S. federal activity in the upcoming quarters which would actually be almost out of the seasonal pattern of your model?
Francois Locoh-DonouPresident, Chief Executive Officer and Director
No, the short answer Sami is, no. I think we’re — what we’re seeing in the federal business just follows the regular seasonality that we’ve seen over the years and we don’t expect fundamental change to that pattern.
Sami BadriCredit Suisse — Analyst
Got it. Thank you. I’ll hand it over to another analyst.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Thank you, Sami.
Operator
Your next question comes from Meta Marshall with Morgan Stanley.
Meta MarshallMorgan Stanley — Analyst
Great. Thanks. A couple of questions from me. First on just — you obviously gave a couple of instances of Shape Security when having success — when they were facing the threat or there was an entry point where they really needed it. But in the past, there have been some delays on proof of concept activity. I just wanted to get a sense of are you’re seeing a pickup there? And then on the second point, just on the ability — kind of gross margin impact you’re seeing from costs, is that mostly expediting? Is there any ability to pass that on just how we should think of the supply chain overhanging the gross margins? Thanks.
Frank PelzerExecutive Vice President and Chief Financial Officer
Hi, Meta. Thanks for the questions. Let me start on Shape. Yes, a couple of quarters ago, we did mention we were seeing the — I won’t get at times to close on these proof of concepts, largely because customers were not in the office and getting those bonds were taking a little longer. We have seen that abate over the last few months and so we’re seeing a pickup in traction and momentum there. And then specifically I think in the e-commerce area. So we’ve got a number of customers whose applications are revenue-generating and they are constantly under these either account takeover attacks or bot attacks that are causing disruption to their business. And so they want to move pretty quickly, on getting things done either as an insurance against future attacks or oftentimes when they under attacks of course things go very, very quickly because their business is disrupted. So generally, we are happy with the quarter we just had with the Shape.
And in general Meta, I would say the other thing we’re seeing with customers is not be vague. A number of customers have been reevaluating their security posture as a result of — some of the high-profile breaches that have been well publicized and that has resulted overall in a very strong year — for the fiscal year for us in security, but especially in the second half where customers have reinvigorated the motion of attaching security to BIG-IP and we’ve also seen the momentum with Shape in security. So, that’s overall the picture we’re seeing in security.
As it relates to your second question on gross margins, yes, gross margins have been impacted by the challenges on the supply chain, whether it’s some increase in prices on some components or some expedite fees to get our supply when we need it. So that the supply chain generally has been quite a challenging environment and generally we have managed that pretty well with our team, but it continues to be a challenging environment. And so we’re going to continue to monitor the developments there and we’ll adjust over time as we need great to.
Meta MarshallMorgan Stanley — Analyst
Great. Thank you.
Operator
Your next question comes from James Fish with Piper Sandler.
James FishPiper Sandler Companies — Analyst
Hey, guys. You guys — Frank, a little bit of a raise thereafter running through all those details. But can you help us a bit understand the amount of recurring software that is term license versus SaaS at this point? As it would suggest SaaS is actually north of 10% of the overall product line today. And within that term license fees, while clearly both go together organic, I guess how specifically, should we think about the growth rate of NGINX we exited this year?
Frank PelzerExecutive Vice President and Chief Financial Officer
Yeah. Fish, thanks so much for the comments and the questions. I think we have not split out those two components, but I — what we like to see which we have continued to see is what it means to have that subscription piece that makes — the number that we have to get for the coming year, much less as a percent of the software revenue, given those dynamics of the subscription base. The split between what I would say is the term subscription versus the SaaS subscription, we have not split out that yet, but stay tuned. We’re continuing to monitor and we’ll let you know when that gets substantial. And I’m sorry but I missed your second question.
James FishPiper Sandler Companies — Analyst
Just how should we think about the growth NGINX today…
Frank PelzerExecutive Vice President and Chief Financial Officer
Yeah. So NGINX continues to grow incredibly well within the base. Again this quarter, we saw from our multi-year subscriptions, NGINX was in more than 50% of those, which is driving great use cases on both sides. And on a customer basis, we continue to see strong growth on the overall customer base within NGINX obtain, NGINX customers. So really, really happy with the progress we’ve seen in NGINX.
James FishPiper Sandler Companies — Analyst
And just quick hallmark piece from me. Threat Stack, so we think about that as a term license business or a SaaS business?
Frank PelzerExecutive Vice President and Chief Financial Officer
That’s a SaaS business but that’s ratable.
James FishPiper Sandler Companies — Analyst
Cool. Thank you, guys.
Frank PelzerExecutive Vice President and Chief Financial Officer
Thank you, Jim.
Operator
Your next question comes from Rod Hall with Goldman Sachs.
Rod HallThe Goldman Sachs Group, Inc. — Analyst
Great. Thanks for the question, guys. I wanted to just check on the guidance and see whether you guys could give us any idea, what’s your thinking on systems and software trajectory into — in Q1? And then I’ve got a follow-up to that. Thanks.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Hey Rod, as you know, we don’t guide on a quarterly basis, do a breakdown of hardware to software. But I mean the indicators that I would give you — yeah, I mean you saw the annual guidance for revenue around 8% to 9%. For software, we’re guiding to 35% to 40% for the full year and hardware slight to — slightly up. On software particular, I mean Frank mentioned it, but I want to stress it. We guided for 35% to 40% last year for the full year, we finished the year at 37%. And — but inside the year, there were strong variability, especially in the first half. And what we — we still expect to land between 35% to 40%. We do expect we will see less variability this year than we saw last year, in part because we have better visibility into a portion of our revenues that are coming from business that is already contracted. And in also in part because of the scale of the business. So expect us to lay in, in the range for the full fiscal year. We’ve always said that quarter-to-quarter there could be some variability above or below that range, but we expect that that variability will be less pronounced.
Rod HallThe Goldman Sachs Group, Inc. — Analyst
Okay. Thanks, Francois. And then I guess, big picture, I wanted to check the — just your thinking on systems in ’22. When I look at ’18, ’19 and ’20, all three years and systems are down, ’20 was down 10% and then you grew system 12% in ’21, and I recognize you’re saying flat to slightly down, but sort of I’m thinking flattish in ’22. But what gives you confidence that ’21 wasn’t an anomaly? We’ve seen that across a lot of different infrastructure companies that we cover where they have seen a lot of demand in ’21, I think people are extrapolating that into ’22 but why is ’21 not a — more of an anomaly, that it is a new normal for you I guess. Thanks.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Yeah. And Rod, from our perspective, when we look at — so, our revenue grew 12% in ’21 and our demand was even stronger than that, because we ended up with the backlog — large backlog at the end of the year. So when we look at that demand in 2021, some of it actually we think is, I wouldn’t call it an anomaly, but we think some of it are transient factors that will go away. We think there was some element of a catch-up demand, because demand was quite depressed 12 months ago, and they also may have been a couple of specific factors earlier in the year when we announce our — and of software development, some customers jumped on that to refresh quickly. So we think some of these are one-off factors. But we’re also saying that there are macro factors that are not transient and that will proceed. And then that specifically, the traffic in use of traditional application is growing and is going to continue to grow because these applications are generating more revenue, more customer loyalty, and more large companies depend on these applications.
And so when you look at 2021, there is some element that’s one-off, there is elements that are not. When we look at that and project to the future, all of that tells us that the demand for BIG-IP as the franchise, so both hardware and software, if you take that combination. We feel today that the demand for BIG-IP in the future even beyond ’22 will be better than what we would have said a year ago.
Now, what will be the mix between BIG-IP hardware and software in the future is still tough to predict because a lot of it depends on individual customer situations and when they are ready to migrate to software and when they’re not. But if you take the combination of those two things, we certainly feel better about it today than we did 12 months ago, and that’s because of factors that are not an anomaly, those are factors that are kind of secular forces that will continue on.
Rod HallThe Goldman Sachs Group, Inc. — Analyst
Great. Okay, Francois, appreciate it. Thanks for the time.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Thank you, Rod.
Operator
Your next question comes from Tim Long with Barclays.
Tim LongBarclays plc — Analyst
Thank you. Yeah, two questions if I could as well. First, maybe you guys mentioned the true forwards. Can you just give us an update on kind of what you guys are seeing on some of those larger term deals as it goes to usage, traffic growth, things like that? I think they were running ahead. So, any color you can give us on true forwards and what that means for your visibility into next year? And then second, thanks for the update on overall security at the Analyst Day. You also gave us a look into the cloud vertical. So I’m just wondering if you could kind of update us on how that cloud vertical performed in fiscal ’21 and what you’re expecting moving forward there? Thank you.
Frank PelzerExecutive Vice President and Chief Financial Officer
Yes. Absolutely, Tim. So on the true forward but we weren’t specific. I would say though that the data that we saw this quarter was actually better than what we saw in Q3. I have to preference that by, it’s a small group of customers that have hit their second term and they’re in their multi-subscription agreements with us, but we saw a fairly healthy step up between that initial term and the second term. And so that’s all very quite positive. And then in terms of the true forward expansions within the terms for those customers, that’s a growing customer base, again that was a bit higher than where we were last quarter. I can’t say that that’s going to absolutely continue but we’re very, very optimistic by the progress that we’ve seen in the data that we’ve gotten so far to date.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
So, Tim, on your second question, just to clarify, when you said the cloud vertical. So when we talked about our cloud revenue at Analyst Day, we’re talking about F5 solutions being deployed in public cloud environment very specifically. So in that number, which at the time we said was greater than $100 million, we do not include a lot of the business we do with hyperscalers, SaaS providers, cloud providers where we are in their infrastructure and helping them deliver applications. So that — so — but our — what that definition clarified, are 12 number continue to grow.
As you know, it’s 100% software, of course, and it has grown faster than our overall software growth rate continued this year. And where we are seeing a lot of traction in the last 12 months is — in what we call private offers on marketplaces. And so essentially, that is consumed as a utility by large enterprises and it is increasingly the case that large enterprises have spend commitments with the major public cloud providers and we’ve done all the integration both technical and commercial that allow these enterprises to retire or their spend commitment on F5. And we’ve seen an acceleration of that trend and it’s yet another way that we are removing friction in the consumption of F5 software in public cloud and we’re getting the benefit of that in terms of growth.
The other big area of growth in public cloud is NGINX. A number of the NGINX deployment continue to happen in public cloud and cloud-native environments. And we are seeing in NGINX, I think as I’ve shared before, when you step back and you look at the success of the BIG-IP franchise over the last 20 years, one of the things that we did well was that BIG-IP consolidated a lot of functionality initially load balancing but then security, authentication, encryption on a single platform, and that made things operationally much simpler for our customers and that created the BIG-IP franchise. And we’re essentially seeing the emergence of the same playbook with NGINX both on-prem and in public cloud environment. The — for modern application and the type of application, security, and delivery that we do in modern apps is not necessarily exactly the same.
There are things like ingress controllers, people feel that they have to secure, authenticate their API, so we offer API gateways. They need to encrypt their traffic inside our service mesh, so we offer that as well. And of course we offer security and protection. But when you think that suite of application, security, and delivery services, we’re seeing that playbook, growth for NGINX and that’s also one of the factors of growth in public cloud for F5.
Tim LongBarclays plc — Analyst
Okay. Thank you. That’s great.
Operator
Your next question comes from Samik Chatterjee with JP Morgan.
Samik ChatterjeeJ.P Morgan — Analyst
Hey. Hi, thanks for taking the question. Also I guess, I just wanted to ask you on the out your targets that you have for 2025, you are already — delivering 8% to 9% is your target for next year, that’s about Horizon 2. In — how you’re thinking about kind of progress from here? Does the tax rate be moved toward the 20%, 25% targets of double-digit growth? Do you see this kind of setting up a base where you get to those targets faster than you expected? The reason I’m asking is, I guess with all the enterprise, IT companies talking about strong demand, we often get the question from investors of how much of this strength is really secular versus maybe in some parts cyclical and driven by investment cycle from the enterprise customers. So just trying to get better — kind of how you’re thinking about how this sets up for the out-years. And as a follow-up. Thank you.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Yeah. Thanks, thank you, Samik. Of course, there is quite a bit of time between now and 2025, but here is I think the way we look at it, Samik. I think when you look back at where we were 12 months ago at our Analyst Day, and we talked about a long-term target of getting to double-digit revenue growth. We didn’t put a year on it, but we felt that we wanted to get to that in the long-term target. If I look at back at where we’re at today — but I would say, the things that we thought will help us out around growth in SaaS and security, growth with NGINX and our new value proposition, that’s going roughly per the — per plan or part of the view that we had at the time. What is going better is, overall, the demand for BIG-IP. And I think in that going better, there is an element of it that is more of a secular trend that will go on for several years. And so that’s kind of the mix.
Now if you step back from it, Samik, what we are seeing is three or four years ago, there was a view of the world, let’s say all apps are going to go to a public cloud and that’s kind of the future of the world. I’m sure you’re seeing from a number of industry data points, including cloud provider is actually saying that themselves that the reality for large enterprises is — for the last many decades, they have always been told that they just have to get to the next thing and everything is going to go to the next thing. And the practical reality of that it, it hasn’t happened, right? And there is a realization now that it’s not about the next thing, it’s about managing a heterogeneous environment and being able to run applications in on-prem environment in public cloud increasingly at the Edge in colocation environment.
And enterprises are very comfortable that that’s going to be the reality and the conversation has shifted not to, how do I get to a single public cloud in the future, but more of a architectural conversation around, OK, I’m going to be in all these places, what is the simplest way? Because that creates complexity for me. What is the simplest way in which I can manage and run my applications across this hybrid environment?
And those conversations, like F5 has spent like five years positioning ourselves for this environment and we’re having a lot of joy because we’re able to support customers on-prem in public cloud, in private cloud, in modern application increasingly at the Edge and we feel that that’s going to be a secular trend that’s going to last for several years. So that’s what we’re positioning for Samik and that’s what — why generally, we feel good about the next few years.
Samik ChatterjeeJ.P Morgan — Analyst
So just to follow-up there, in terms of positioning the company and you talked about application security being one of the strongest growth areas that you’re looking at. I mean, should we assume that most of the M&A that evaluate going forward is going to be focused on that segment? Thank you.
Frank PelzerExecutive Vice President and Chief Financial Officer
Well, I — first of all, we have — as I — I think I’ve said before that we did three acquisitions in quick succession, it’s pretty substantial acquisition between Shape, NGINX, and Volterra. And so when we acquired Volterra, we felt that we needed to really focus on the completing integrations of Shape and NGINX and Volterra in that period, and we’re well on our way of doing that. And I think that’s going to — we continue to be focused on that — on those organic integrations and extensions and now Threat Stack brings a very interesting new capability to F5 in giving us visibility into these cloud environments and being able to observe the environments in which cloud workloads are running which complements very nicely the rest of our security portfolio, which as you can see is a 100% focused on application security and essentially building the broadest portfolio and application security stack.
So that’s been the focus. In terms of potential future M&A over time, we’ll continue to evaluate building versus buying. You’ve heard me say before, we’re very disciplined about that. We start always with — our preference is to build. But if for a time to market reasons or there is an opportunity to do something that accelerates our vision, then we look at that. The focus of that will continue to be on fulfilling this vision for adaptive applications, which is essentially about the world of running applications for large enterprises is still very manual fraught with complexity and fraught with fragility. And we have a — an architectural vision that we think is going to bring way more automation to this world, way better uptime for applications, way stronger security, and way better intelligence and insights about the performance of applications.
And that’s what we will focus on bringing that vision to our customers, bringing it to reality. And every single quarter organically or inorganically down the road, we are making that vision more and more of a reality. And I think elevating F5 to more of a strategic partner for our customers’ digital transformation rather than a point solution player.
Samik ChatterjeeJ.P Morgan — Analyst
Okay. Got it, got it. Thank you.
Operator
Your next question comes from Alex Henderson with Needham.
Alex HendersonNeedham & Company — Analyst
Thank you very much. So I was hoping you could you talk a little bit about, now that the fiscal year’s ended, what the transition between last year and this year in terms of market share for NGINX looked like? It looks to me like you’ve picked up substantial share over the course of the year. Can you talk about that a little bit? My guess is, you’re up around 65% to 67% market share. Is that accurate within Kubernetes workloads?
Kara SpragueExecutive Vice President and General Manager, App Delivery and Enterprise Product Ops
Hi Alex, it’s Kara. So we have — we’re very happy with what we’re seeing in terms of the adoption of NGINX. Now Francois mentioned that NGINX plays a variety of roles in an application, for example. One thing that’s commonly reported is the use of NGINX as a web server and it is true that we have overtaken Apache, NGINX is the number one leading web server. There is other uses like reverse proxy, NGINX used as an API gateway, and API management capability. NGINX used now increasingly as a workload protection capability. And in those areas, there is less reporting on the shares. And so at least the one that has very regularly been reported and we see consistent gains as the webserver piece and we’re very happy with the outcome there.
Alex HendersonNeedham & Company — Analyst
Okay. And could you talk a little bit about to the degree to which you’re able to identify the number of coders that are working with your technology and to what extent there is a growth rate or a rate of adoption among the coding community? Can you talk about your outreach there and to what extent that that’s one of the key building blocks as we go forward?
Kara SpragueExecutive Vice President and General Manager, App Delivery and Enterprise Product Ops
Yeah. So we’ve always had a very active community of engaged individuals around F5 technologies. Even if you go and you look at our capability in BIG-IP, given that was one of the most programmable proxy solutions available in the market, we had a very active community of contributors who were sharing iRules based solutions and are actively contributing and continue to actively contribute through our developer community. Now that community has grown even further as we extended our portfolio with NGINX. As you know, just given NGINX has an open — it’s an open core model and the NGINX open source attracts a wide variety of application developers that use that as a fundamental technology for their solution. That’s an additional expansion of the developer community around that.
And as we look ahead, as we’re expanding our portfolio and looking into building what Francois talked about with the Volterra offering, we expect that to continue to be a very important part of our technology and our strategic direction. It’s appealing to developers and providing them the tools they need to deliver excellent digital experiences.
Alex HendersonNeedham & Company — Analyst
So no quantification though?
Kara SpragueExecutive Vice President and General Manager, App Delivery and Enterprise Product Ops
No quantification at this time.
Alex HendersonNeedham & Company — Analyst
Okay. If I could slide one last one in then. Can you talk a little bit about competition between Cloudflare, Akamai and other players in that space? Thanks.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Yes, Alex. So we are — for the most part, I would say we don’t compete very directly with Cloudflare, that’s not a significant overlap today. I think that will grow more as we introduce our Volterra platform to wide distribution post the integration, because we will play way more at the edge with SaaS security offerings for a wide range of customers. We do see Akamai specifically with Shape Security in the — protecting customers against bot attacks, and I think their approach is the bundle security with their CDN especially for customers that are using their CDN. We have an approach that’s more about best in-class efficacy for enterprise customers that place a significant premium on having world-class efficacy against bot attacks, and we do very well with that customer segment.
So we’re starting to see more and more competition with these players. And I think as a disruptor, with our universal Edge platform, that competition is going to grow, but we feel very good about the attributes of Volterra. And when you combine these all — these attributes that Volterra bring as an Edge universal platform and you put there, the best in-class security stack that F5 provides from Shape from BIG-IP, yeah, I think you have a formidable offering for customers that want to consume security as a service at the Edge. I think that’s going to be a best in-class offering.
Alex HendersonNeedham & Company — Analyst
Great, thanks.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Thank you, Alex.
Operator
Your next question comes from Paul Silverstein with Cowen.
Paul SilversteinCowen Inc. — Analyst
Thank you for squeezing me in. And I’m going to assume and hope on the last one, so it could ask my five questions. But on a serious note, Francois and Frank, I’ll apologize if you all have already answered these questions because you all talk faster than I can listen. So with that big wind up. First off, with respect to the operating margin rebounded as you all referenced in the past, can you walk us any insight on the glide path considering the significant supply chain challenges that you face along with everybody else in the industry? And before you respond, since it’s on the same topic. In the — if I heard you correctly, it’s 8% to 9% of your revenue guidance you provided for fiscal ’22, what are the supply chain assumptions with respect to that growth rate? What assumptions you’re making underlying that?
And finally, also related, can you address — I assume your visibility into that 8% to 9% visibility, in general, has improved as an increasing number of customers have provided you with a longer-term forecast. But I just would like to confirm that that is, in fact, the case that was fully has been continuing to improve if, in fact, customers are providing those longer-term forecasts. Thanks so much.
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Yeah, Paul. So let me start with your second question, I guess first. So in terms of what we think about for our outlook on the 8% to 9% in supply chain. As we’ve said in the prepared remarks, it does not anticipate a materially better outlook in terms of our supply chain, even though you’re able to get components, able for everything else. And so, we are assuming that we are looking at 8% to 9% on what we believe we can ship and what we believe the demand will be for those products.
In terms of the specific operating margin expansion as you recall, we had a 32% to 34% range that we’ve tightened up to 32% to 33% largely driven by the gross margin hits that we have been seeing and what we expect to see because of some of those supply chain constraints through FY ’22. And so, we are increasing obviously the efficiencies that we’re seeing in the business by lifting that up from where we ended at that that 31.6%. So at the midpoint, almost 100 basis points increase. But we’re doing that on the backs of having higher cost on the gross margin side, so actually even some more efficiency is coming through the operating margin.
Paul SilversteinCowen Inc. — Analyst
And on the visibility question? And Frank, just to be clear, if the supply chain improves, does that translate to better than 8% to 9%?
Frank PelzerExecutive Vice President and Chief Financial Officer
It could, but I don’t anticipate that from what we see right now. Paul. I mean, I — again, we’re early in Q1, so anything is possible. But what we’ve seen — the — obviously all of the things that we’ve been reading from the other vendors collectively, I don’t think people are seeing a material — starting to see some improvement in the back half of FY ’22 calendar, which is our Q4 obviously. So it doesn’t leave us a ton of room to catch up.
Paul SilversteinCowen Inc. — Analyst
Understood. It has visibility improved because of long-term forecasting from customers?
Frank PelzerExecutive Vice President and Chief Financial Officer
Visibility, the visibility on demand, I think, has improved. I think the visibility on supply has not. And so matching those two up with long lead times, it’s hard to say that you catch up within a reasonable period of time.
Paul SilversteinCowen Inc. — Analyst
I appreciate the responses. Thanks so much.
Operator
Due to time constraints, we’ll be taking our last question from Fahad Najam with MKM Partners.
Fahad NajamMKM Partners — Analyst
Thank you for squeezing me in. I just want a clarification. Your fiscal ’22 revenue guidance assumes $15 million of revenue contribution from Threat Stack. And if — am I correct that is almost all entirely software recurring in nature?
Frank PelzerExecutive Vice President and Chief Financial Officer
Yes. $15 million just to be clear, you broke up the for the first second, Fahad.
Fahad NajamMKM Partners — Analyst
Okay. So the question is, if we exclude the Threat Stack acquisition, then you would hypothetically not have roughly 50% of your revenue coming from software, given the strength that you’re seeing in systems? So one, do you — so it’s kind of like undershooting your targets as you laid out in at the Analyst Day. Is there like something that you see there is a slowdown in terms of organic software growth? Just trying to understand how — because I think at the Analyst Day you had highlighted that you would expect to achieve roughly 50% of your revenue, good that 50% of your revenue coming from software. So if fiscal ’21 is kind of 47% if my math is right, then you would expect significant acceleration in software in fiscal ’22. So just trying to understand what would change in software adoption going forward that hasn’t yet happened in the fiscal ’21?
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Yeah. No, Fahad, thank you. Okay, to be clear, we are in fact hitting our targets that we laid out our aim. So we said 35% to 40%, we did 37% this year and we guided to 35% to 40% next year. Whether or not we exit next year at a mix between hardware and software that is 50% or more of software, we have, I think we will get there eventually because the trajectory on software is one of growth and we’ve said over time, we don’t think hardware will be a — an engine of growth. But frankly, if we don’t hit that target largely because our hardware has quarterly overperformed, we will be very happy with that. And not just happy because of what’s going on in the short term but happy because what it translates to is A, that the BIG-IP franchise overall is doing better than we thought, and B, all these customers that are extending their time purchasing hardware and not making a transition to software, it creates a bigger installed base for us to migrate to software down the road. So it actually is very good news over time even for our software business, because we have a much bigger real estate.
So we’re — the — what we’re focused on of course, is if you look at it in absolute dollars we will absolutely hit the targets that we gave for software revenue for F5 in our Horizon 2. If those absolute dollars translates to 50% mix, that’s fine. If they don’t because hardware has overperformed, we’ll be happy with that.
Frank PelzerExecutive Vice President and Chief Financial Officer
And Fahad just is there — Francois stating what we said before, we said our exit rate 50% that would be the equivalent of the 45% of what we just did in Q4. And so the trajectory is absolutely heading in that direction and stay tuned, it’s Q1.
Fahad NajamMKM Partners — Analyst
Yeah. And actually just to kind of follow up on that. So to your longer-term targets circa 25, it seems like your business is actually projecting pass the — toward software given the strength in hardware. I think I’m just trying to make sure that I’m understanding it correctly that maybe there is actually fundamental improvement beyond for the — what was laid out at the Analyst Day. It seems like the longer-term targets of how are you going to be better than what was paid out. But again, it’s — as you’ve mentioned it’s early days, but just trying to understand the framework.
Frank PelzerExecutive Vice President and Chief Financial Officer
I just would point to the obvious, but if we just did over 10% total growth in the first year of a Horizon 2 and so your basis comes out much bigger on which to build going forward. And so where we’re incredibly excited about the trajectory of the business that we’ve been seeing. We talk specifically about FY ’22 guidance, more to come on the long-term target updates, but our focus is really on ending Horizon 2 at or above any of the expectations that we set at our Analyst and Investor Day as well as what we updated after the Volterra acquisition.
Fahad NajamMKM Partners — Analyst
Appreciate the answers. Thank you.
Operator
[Operator Closing Remarks]
Duration: 67 minutes
Suzanne DuLongVice President of Investor Relations
Francois Locoh-DonouPresident, Chief Executive Officer and Director
Frank PelzerExecutive Vice President and Chief Financial Officer
Kara SpragueExecutive Vice President and General Manager, App Delivery and Enterprise Product Ops
Sami BadriCredit Suisse — Analyst
Meta MarshallMorgan Stanley — Analyst
James FishPiper Sandler Companies — Analyst
Rod HallThe Goldman Sachs Group, Inc. — Analyst
Tim LongBarclays plc — Analyst
Samik ChatterjeeJ.P Morgan — Analyst
Alex HendersonNeedham & Company — Analyst
Paul SilversteinCowen Inc. — Analyst
Fahad NajamMKM Partners — Analyst
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