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F5 Networks Inc (NASDAQ:FFIV)
Q1 2021 Earnings Call
Jan 26, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the F5 Networks' First Quarter Fiscal 2021 Financial Results Conference Call. [Operator Instructions]

I'll now turn the call over to Ms Suzanne DuLong. Ma'am, you may begin.

Suzanne DuLong -- Vice President, 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A copy of today's press release is available on our website at f5.com, where an archived version of today's call will be available through April 27, 2021. 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. The replay of today's call will be available through midnight Pacific Time, January 27th, by dialing (800) 585-8367 or (416) 621-4642. Use meeting ID 6055259. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com.

Our discussion today will contain forward-looking statements which include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. 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.

And with that, I will turn the call over to Francois.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Thank you, Suzanne, and good afternoon, everyone. Thank you for joining us today. Our first quarter results show the strong momentum in our business. We delivered Q1 non-GAAP revenue of $626 million, representing revenue growth of 10%. We also delivered 70% non-GAAP software revenue growth, systems growth of 5% and global services growth of 1%.

Several quarters into the pandemic, several things are becoming clearer from a macro perspective. First, the realities of the pandemic have accelerated our customers' digital transformation and both business and consumer dependency on applications. At the same time, consumers' expectations about their application experience have increased significantly. As a result of higher volumes and higher consumer expectations, our customers are ramping their investments in their applications and the infrastructure needed to securely deliver them.

In addition, incumbency is a significant advantage for F5 in the current environment. Customers want a trusted and operationalized partner, they know they can count on. These macro drivers play to our strength, including our strategy to invest over the last several years in pursuit of our adaptive applications vision. Our continued investments in BIG-IP for multi-cloud deployments and the deliberate and early investment in both NGINX and Shape are enabling us to rapidly grow our application security and delivery footprint in modern-application environment.

I will speak more to our business growth drivers and momentum, including some customer highlights from the quarter after Frank reviews our first quarter financial results and our outlook for Q2. Frank?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Thank you, Francois, and good afternoon, everyone. As we previewed in our preliminary results announcement and as Francois just highlighted, we delivered a very strong Q1. On a GAAP basis, Q1 revenue was $625 million. First quarter non-GAAP revenue of $626 million was up 10% year-over-year and well above the high-end of our initial $595 million to $615 million guidance range.

Please note, as I review our revenue mix, I will be referring to non-GAAP revenue measures. Also, this will be the last quarter, we speak about non-GAAP revenue as we lap the acquisition of Shape. Going forward, the add-back of the Shape purchase accounting writedown is de minimis.

Q1 product revenue of $289 million was up 23% year-over-year and accounted for approximately 46% of total revenue. This is the strongest product revenue growth we have delivered since Q2 of fiscal year 2011, nearly a decade ago. As Francois noted, customers accelerating their digital transformation efforts drove growth in both our software and system sales. Software revenue was $111 million, growing 70% compared to the year-ago period, which did not include contribution from Shape. Excluding Shape's contribution in Q1 of '21, software revenue grew approximately 35% year-over-year.

Our mix shift continued this quarter with software representing 38% of product revenue in Q1, up from 28% in the year-ago quarter. Customers' preference for flexible subscription models continue to fuel our subscription revenue momentum. In Q1, we again drove record-subscription volume with subscriptions representing 77% of software revenue in the quarter. Services revenue of $337 million grew 1% year-over-year and represented 54% of revenue.

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 66% of revenue in the quarter. This is up from 63% in the year-ago period. The improvement comes largely as a result of the strong subscription software momentum I mentioned previously. Systems revenue of $179 million was up 5% compared to last year. Francois will speak to the drivers of the strong performance in more detail.

On a regional basis in Q1 Americas delivered 14% revenue growth year-over-year, representing 55% of total revenue. EMEA delivered 4% growth, representing 26% of revenue, while APAC grew 7% and accounted for 19% of revenue. Looking at our bookings by vertical, enterprise customers represented 67% of product bookings, service providers accounted for 14% and government customers represented 18% of product bookings, including 6% from U.S. Federal.

Let me now share our Q1 operating results. GAAP gross margin in Q1 was 81.6%, non-GAAP gross margin was 84%. GAAP operating expenses were $392 million, non-GAAP operating expenses were $322 million. Our GAAP operating margin for Q1 was 18.9% and our non-GAAP operating margin was 33%. Our GAAP-effective tax rate for the quarter was 25.1% and our non-GAAP effective tax rate was 21.7%. GAAP net income for the quarter was $88 million or $1.41 per share. Non-GAAP net income was $161 million or $2.59 per share.

I will now turn to the balance sheet. We generated $137 million in cash flow from operations in Q1. Cash and investments totaled approximately $1.5 billion at quarter-end. We did not make any share repurchases in Q1. We remain committed to repurchasing $1 billion in shares over the next two years, including $500 million via an accelerated share repurchase program in fiscal year 2021. DSO was 50 days and capital expenditures for the quarter were $5 million. Deferred revenue increased 10% year-over-year to $1.4 billion. We ended the quarter with approximately 6,160 employees, up approximately 50 from Q4.

Now, let me share our guidance for our fiscal second quarter. Unless otherwise stated, please note that my guidance comments reference non-GAAP metrics. Also, with the Volterra deal recently closed, our Q2 outlook incorporates the addition of their financials to our guidance expectations. Near term, we expect customers will continue to invest to support application growth and the modernization of their application infrastructures.

We also anticipate continued focus on an investment in application security. With this in mind, we are targeting Q2 fiscal year 2021 revenue in the range of $625 million to $645 million, reflecting year-over-year growth of approximately 8.5% at the midpoint of our range. While we do not give quarterly guidance on product revenue mix, we do anticipate continued near term strength in systems with Q2 growth likely similar to Q1.

We would also remind you that our prior year Q2 software revenue growth was exceptionally strong at 96%. This difficult comparison is likely to be reflected in our Q2 '21 software growth rate being below our Horizon 2 target of 35% to 40%. This is consistent with our commentary about the potential for quarterly variability in software growth rates as we continue to scale our software business.

We expect Q2 '21 gross margins of 84% to 84.5% and we estimate operating expenses of $340 million to $352 million. As we discussed last quarter, we generally see a seasonal increase in operating expenses in Q2.

We expect our Q2 operating margin to decline from Q1 and then to increase in the back half of the year to achieve our FY'21 non-GAAP operating margin target of 31% to 32%. I will remind you once more that our Q2 '21 outlook also incorporates the addition of Volterra into our operating model.

We anticipate our effective tax rate for Q2 will be in the range of 21% to 23%. Our Q2 earnings target is $2.32 to $2.44 per share. We expect Q2 share-based compensation expense of approximately $62 million to $64 million. As for capital deployment, as I mentioned previously, we intend to repurchase 500 million shares via an accelerated share repurchase in fiscal 2021.

With that, I will turn the call back over to Francois. Francois?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Thank you, Frank. Several quarters into the pandemic, it is growing clearer that COVID has accelerated digital transformation and both business and consumer dependency on applications. As a result, our customers are accelerating their digital transformation investment. Incumbency is also an advantage for us in the current environment and together these trends are enabling us to drive strong growth.

Underneath these macro drivers and consistent with our discussion at our November Analyst and Investor meeting, there are three F5 specific growth drivers fueling our demand. One, ongoing software and subscription momentum, two, growing demand for application security and three, resiliency in system space demand leading to moderating systems revenue declines.

As we noted in November, these multiple growth drivers mean that we also have multiple paths to achieve our Horizon 2 revenue growth targets. More specifically, we do not need everything to go exactly right to achieve our goals. In Q1, we had a lot go right and customer demand drove growth across all three of these drivers. I will speak to each in turn.

First, we continue to see demand for software and subscription consumption across our application security and delivery solutions. I will focus first on our BIG-IP and NGINX solutions. Customers look to BIG-IP to refresh core business applications for capacity additions and to simplify traditional application delivery in cloud environment.

In one example during Q1, a large financial institution struggled for months to turn up a mission-critical application in a cloud environment. This was despite the best efforts of the cloud provider they were working with. Frustrated, they turned to F5. In under one day we helped them get the app up and running in the cloud with multiple BIG-IP Virtual Editions. This use case highlights the customer benefits we have driven as a result of our investment to modernize BIG-IP making it easier and more efficient to use in cloud environment.

Let me turn to NGINX. At the time of the NGINX acquisition we deliberately invested in new products accelerating time to market. Specifically, we built a joint F5 NGINX Controller and rapidly ported F5 security to the NGINX platform. This quarter NGINX delivered its largest quarter ever with broad-based strength across geographies. This strength was driven in large part by robust NGINX Controller traction as well as integrated F5 security through NGINX App Protect.

During Q1 we also secured a win for BIG-IP Controller, NGINX Plus and NGINX App Protect with a longtime F5 federal government customer. While upgrading its current BIG-IP infrastructure, this customer also selected NGINX to help prepare for migrating network infrastructure from physical to virtual, while building out capabilities to support continuization.

NGINX is leading the way in a number of modern application use cases, including cloud-native load balancing, scaling APIs and delivering Kuberneted applications in production. As applications continue to get more distributed we expect the investments we are making to deliver API gateway, API management and service mesh capabilities will drive additional NGINX momentum. It should come as no surprise that customer demand for application security is also growing. With the ongoing pandemic fueling ever-increasing consumer use of digital channel, the threat landscape is growing significantly.

With application-based attacks growing both in numbers and sophistication, customers are looking to F5 for help. The combination of our organic investment and the addition of Shape has created an enhanced F5 application security portfolio. If you map our solution set against the top application security threats, it is clear that we are very well positioned to help our customers address the most frequent incident and the most damaging regions.

We continue to see increased interest in adding F5 enterprise-grade web application firewall protection to modern applications. During Q1 a major car manufacturer selected NGINX with App Protect when they needed a cloud-independent, affordable, scalable solution that included a container-friendly web application firewall. We also are seeing growing traction for SSL orchestration. This encrypt/decrypt use case is a strategic differentiator for F5. And while it tends not to be a big revenue driver on its own it is a strategic control point in enterprise customers security stock, which gives us the ability to pull in BIG-IP security and Shape.

Let me speak also to the traction we are seeing with Shape and in particular, our Shape, Silverline combination. Last quarter we highlighted the benefits of making Shape's industry-leading anti-fraud solution available to a much larger customer base through our Silverline managed services platform. Silverline Shape Defense delivers advanced bot protection to prevent large-scale fraud. Shape AI Fraud Engine or SAFE is a cloud fraud prevention service.

As a combined solution, our Silverline Shape Defense and SAFE solutions enable sparsely resourced organization to deploy true industry-leading capabilities. Combining Shape's anti-bot and anti-fraud capabilities with Silverline in managed service also makes it easy to quickly deploy Shape's capability, which is especially useful when customers are in crisis. There are two interesting use cases that have emerged.

First, Shape Silverline Defense is being used by several U.S. states to combat rampant fraud related to unemployment benefits. The combination of sky high demand and limited security of fraud capabilities created an ideal environment for fraudsters, who are conducting sophisticated attacks against unemployment sites as well as other unprotected state domains.

With the Shape Silverline Defense solution we can go in and offer real data about what is happening, unveiling the true scale of the threat. Once enabled Shape's sophisticated AI and machine learning capabilities identify and block the fraudsters. Credit unions also are emerging as an ideal use case for Shape Silverline Defense. With new web and mobile banking capabilities coming online and larger transfer limits being introduced, credit unions can present an easy target of sophisticated attackers.

Pressure to provide the same services as big banks is exposing them and their lack of cyber security and fraud capabilities. Silverline Shape Defense provides an affordable turnkey, easy to deploy managed security and fraud solution as evidenced by the five credit union wins our sales team delivered in Q1 2021.

We are as excited as ever about the use cases Shape has opened for us. Going forward, we see additional potential to leverage Shape's analytics engine to build new analytics offering that enable us to go beyond application security to drive revenue enhancement for customers.

Finally, let us talk about systems and the drivers for the growth we saw in Q1. First, I will note that our systems business is also benefiting from the macro trends I mentioned previously, mainly COVID driving increased application use and accelerating investment in digital transformation. Q1 strength in systems was broad based across geographies and industries. We identified three primary factors behind our strong system performance.

First, as we have discussed previously, we have seen growing demand for systems-based security use cases. Second, over the last several years, customers have gained clarity on their cloud strategies and now expect to operate in a hybrid multi-cloud world for some time to come. As a result, we are more willing to purchase systems to support capacity need, driven by accelerating digital transformation. We believe both of these drivers are sustainable.

Third, Q1 also benefited from some COVID-suppressed system catch up. Customers who have put off systems purchases for several quarters simply can no longer defer growing capacity demands. For a very small subset of our customers that had not refreshed in a long time, a long planned April End of Software Development milestone on one of our legacy systems, contributed to their desire to act sooner rather than later.

For clarity, I would note that End of Software Development is very different than End of Support. In this case, the April milestone pertains to an end of software development date that has been well publicized for years, providing customers a long planning runway. We estimate this catch up demand drove approximately $10 million in system sales in Q1. We see this as a transient systems growth driver but we do expect it to carry over into Q2.

Finally, while I did not call it out as a growth driver, our expanded reach and role has also expanded our strategic position with customers. This has enhanced our ability to connect with C-level personas and also means we are more often considered for opportunities that span our application security and delivery portfolio, bridging traditional and modern application in both hardware and software form factors.

As an example, in Q1, one of the United States' leading healthcare providers selected BIG-IP hardware, software, security and NGINX to keep their critical care applications running non-stop, while beginning to migrate to next generation apps for their care providers. This project reemerged as a priority for the customer after being deferred last February, so the customer can divert all necessary resources to fight with COVID.

In closing, we are encouraged by our momentum and believe we are seeing clear signs that our organic investments and our value creation methodology for both NGINX and Shape are paying off for customers and investors alike. We were very pleased to announce that our acquisition of Volterra closed yesterday and the team has already begun the hard work of integration. Initial customer feedback about the combination of F5 and Volterra has been very positive. Customers are excited about the potential of F5 Edge 2.0 to eliminate the pain they feel from today's closed edge platforms.

Our Edge 2.0 will be the first edge platform built for enterprises and service providers. It will be an open-edge platform that will allow every service to run on any server, virtual or otherwise, inclusive of public clouds. We are very excited to have the Volterra team as part of F5 and are looking forward to sharing our progress with you going forward.

I will wrap up today's prepared remarks by thanking the entire F5 team again as well as our customers and our partners. With that, operator, we will now open the call for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Sami Badri from Credit Suisse. Please go ahead.

Sami Badri -- Credit Suisse -- Analyst

Great, thank you, and congratulations on a solid quarter, and highlighting some of these major trends and drivers that we're seeing in your business. So Francois, I want to go back to almost about a year ago when the pandemic first started and you called out all these -- you called out pros and cons of the pandemic, some deals being pushed out, some deals being reaccelerated back. Some of the catch-up demand that you saw in fiscal 1Q and the catch-up or potential pull-forward -- sorry, for everyone, I'll put it the catch-up demand in fiscal 2Q '21. Are you basically seeing all the deals that were funded about a year ago or through 2020 are all essentially coming back to full force or at least within 2021?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Hey, Sami, thanks for the question. The short answer is no. The -- on the -- what we call the catch-up demand, there are some customers and I would say there is subset -- a small subset of customers who have waited and waited and waited on adding capacity, in part because of the uncertainty related of COVID or the absence of resources or the ability to physically do it, who are now doing those refresh. But it isn't -- if you go back to the deals that were pushed out at the beginning of the pandemic, there were some software deals, we call them software transformation deals that were pushed out and we're starting to see these come back, but not yet in a big way. So I think that's still ahead of us.

Sami Badri -- Credit Suisse -- Analyst

Got it, got it. My other question is to do with systems revenue and I know we had the Analyst Day relatively recently where you did guide a little bit differently for systems versus what you're guiding today and reported fiscal 1Q and then guiding to fiscal 2Q with the 5% growth. Now based on some of the underlying industry drivers that you highlighted and some of the customers that have identified F5 gear as like the go to gear for security measures, does your overall Analyst Day guide boost for negative growth of systems in fiscal year 2021 and for Horizon 2? Does that kind of now go away, are we looking at a little bit of a different trajectory?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Well, Sami, I think we've got to go back and look at the drivers of our hardware business. So I think if you look at where we're at today, Sami, there are two kind of macro things that are benefiting the company in general. Generally, there is more spending on applications infrastructure and we have positioned ourselves to benefit from that and I think that's a long term effect.

There's also the effect of -- the company is strategically better positioned because of the combination of hardware and software and cloud solutions and security solutions that we have and that allows us to have more strategic conversations with our customers and being seen as a future-proof partner for the strategic plan. And all of that benefits all of our business, including our systems business.

If you look at the drivers, specifically to our systems business, there are two drivers that I think our long-term and one that is more of a transient driver. And so, if you look specifically on the long term, we talked about at Analyst Day that our mix of security has grown and that was helping our systems business and this quarter we saw again stronger growth in security than in the overall demand. The -- so that helps the systems business.

The second factor in our systems business is that generally we have some customers who -- if you recall, we talked about that two, three years ago. Customers who basically have said they were either going all in on the cloud or they were essentially pausing their -- the systems business to reconsider their architecture for public cloud deployment. And I think a lot of customers were seeing -- have kind of graduated from that and now have a clear strategy around the cloud.

They have maturity around knowing that they're going to operate in hybrid cloud environment for a long time to come and are very comfortable moving forward with hardware as part of their long-term architecture. And so, we're seeing some customers that have decided not to buy any more hardware at all that are coming back and now refreshing or adding capacity to their systems. So I think those two aspects are longer-term, Sami.

There is one transient driver, which is a subset of our customers that really had to make a refresh because it is on the software development. We think that was about $10 million in the quarter, we think that kind of carries on in Q2, but that's a really short-term demand. So when you take all of that into account Sami, we're not changing our Horizon 2 guidance, but yes, there is the possibility that our hardware business will do better in Horizon 2 than what we saw at AIM. We certainly think that for FY'21, it's likely to do better than what we had in our overall Horizon 2 guidance.

Sami Badri -- Credit Suisse -- Analyst

Got it. Got it, thank you. Congrats again on the quarter and the dynamics and I'll pass it over the next question.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Thank you, Sami.

Operator

Your next question comes from Alex Henderson from Needham.

Alex Henderson -- Needham & Company -- Analyst

I was hoping you could talk a little bit about what you think the impact might have been from the SolarWinds hack and to what extent your software, your systems, your cloud capabilities are seeing an acceleration in demand, if you've heard from and of your CIO, CTO, CFOs, CEO contacts or even Board contacts, whether companies are increasing their spend on IT or specifically security as a result? And to what extents, you think that will translate to F5 demand?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Alex, you asking if they're increasing spend on cloud and security as a result of what?

Alex Henderson -- Needham & Company -- Analyst

The SolarWinds hack.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Okay. Not necessarily directly, Alex, there is a -- there is of course heightened awareness of it generally by CISO and security organizations. Our security trends have been pretty strong over the last several quarters. The aspects that have accelerated security for us relate more to a -- more customers moving to software and attaching more security use cases as they move to software. Same happening when they move to the public cloud, attaching more security in the public-cloud environment.

And then with the addition of Shape, what we have seen -- frankly, since the pandemic started, but we're still seeing today is as more and more businesses go to digital channels, they -- that also attract more fraud and so our offers for anti-fraud are seeing very strong demand. I mentioned a couple of use cases in my prepared remarks, but that is across the board, large and small companies. There is more online fraud and we're very well-positioned to protect against that.

Alex Henderson -- Needham & Company -- Analyst

If I could follow up. So clearly, you guys are seeing an increased correlation between your appliance sales and your software sales. You're suggesting that's from hybrid cloud, but how that hybrid cloud has been in place for quite a while? Is it also possible that the launch of the Beacon product and the integration of NGINX back into the appliances accelerate and expand your ability to tie together the enterprise IT spending for campus and data center with the cloud integration and therefore, pulling both as a result?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Alex, yes, there is a -- there is definitely an element of the overall portfolio creating stronger demand for F5. Beacon, it's still early days but certainly, with NGINX, there is a significant factor and we're seeing it here. It -- the halo effect of our participation in modern application, we are -- what's happening, Alex, is a lot of times, we think about traditional and modern applications in kind of separate silos, but the reality for large enterprises is they do a lot of application modernization. That is, they will have a traditional application that is typically supported by BIG-IP and as they modernize that application, they don't refactor it, but they add modern component to that application.

And these new modern component, typically microservices, NGINX is ideally suited to support these modern components. And so we're seeing that the combination of NGINX and BIG-IP gives a full solution set for these modernization initiatives that customers have and it's pulling both NGINX and BIG-IP together. So there's definitely an effect of the portfolio and the synergies coming together and driving growth.

Alex Henderson -- Needham & Company -- Analyst

Great. Thank you very much, I appreciate the answer.

Operator

Your next question comes from the line of Tim Long from Barclays. Please go ahead.

Tim Long -- Barclays -- Analyst

Thank you. Two quick ones, if I could. First, could you guys talk a little bit about the organic software revenue growth line? Francois, understanding the tough compare, but maybe just talk a little bit about how we should look at that line in the future? Are we going to see it being a little bit less lumpy particularly as we've seen deferred revenue really grow pretty strongly. So is that something you expect to normalize around a higher number as we get through some of the tougher compares?

And then second, I think at your Analyst Day or somewhere around there, you talked about $100 million cloud revenue number. Could you just give us a little color in the quarter, whether it was qualitative or quantitative around how the cloud-specific software businesses did for F5? Thank you.

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Yes. Hi, Tim, it's Frank. Let me start with the first part, and I'll turn it onto Francois for the second. In terms of the organic growth in the quarter, we talked about 35% and in the second quarter, we talked about that being likely lower than that 35% to 40% range that we've given you for Horizon 2. Based off the tough comp that's coming up at 96% in Q2 of 2020. And as the business continues to scale and as we get more of it from recurring subscriptions, we do expect to have some more normalization in that and not necessarily see the same swings.

But as we talked about from the beginning, when we discussed software revenue, gosh, almost three years ago now, we said that it will be lumpy for this time as we continue to build out scale in the model. But overall, we are not changing at all our Horizon 2 outlook of compounded annual growth rate of 35% to 40%. Francois, you want to add anything on the cloud side?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Yes, on the cloud side -- so, Tim, we have very strong demand in the cloud. The growth in public cloud was actually stronger than the organic software growth rate that you saw and that has been the case for the last number of quarters. And just generally seem -- the demand of software, yes, we will see still some variability, but the overall demand drivers for software are very strong and I'll point to a couple.

We had a all high -- all-time high number of multi-year subscription agreements in the quarter. A lot of these subscription agreements include multiple software solutions from F5, including NGINX. NGINX had the best quarter ever and we're really seeing as customers start to really deploy these modern applications, NGINX growing very fast. We also made some investments still as you know in NGINX, a year ago in the Controller and app security, and we're seeing the effect of those in terms of growing the size of deals that we have and the addressable deals that we can bring to the table.

And so when you factor that cloud, the number of subscription agreements, NGINX, and some new catalysts that haven't played out yet, we have some catalysts around the true-forward in our subscription, some new use cases for Shape that are coming. So we feel very good about our software for Horizon 2.

Tim Long -- Barclays -- Analyst

Okay, thank you.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Thank you, Tim.

Operator

Your next question comes from Paul Silverstein from Cowen. Please go ahead.

Paul Silverstein -- Cowen & Company -- Analyst

Appreciate it. Before I ask my questions, I was hoping I could ask upfront to just clarify two pedestrian issues. One, Frank, does the math -- is my math right that Shape did roughly $22 million in the quarter in your comment by organically...

Frank Pelzer -- Executive Vice President and Chief Financial Officer

I can...

Paul Silverstein -- Cowen & Company -- Analyst

In total growth for software?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Paul, actually it was higher than bud. So it's -- we didn't get the exact number but it's higher than though, some slight growth over what we experienced in Q4.

Paul Silverstein -- Cowen & Company -- Analyst

All right. I suspect not knowing then possibly ask. Francois, you made a statement multiple times that you had the best -- record NGINX quarter, which means you clearly know what the specific NGINX revenue was. Is that a number you're willing to share with us? I hope the answer is yes.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

No, we haven't broken out NGINX lately, but it's -- you saw the numbers, Paul, that we shared at our Analyst and Investor Day around doubling of revenue of NGINX and the growth in deal size and essentially this trend is continuing or accelerating I should say.

Paul Silverstein -- Cowen & Company -- Analyst

Yes. No, I get it, but I -- OK, I'm not sure. You want credit for it, but you don't want to give us the details. But I'll move on. Let me ask you the real questions. Operating leverage, you've been very clear that you're going to drive operating leverage this year, next year and beyond. I assume it's as simple as you guys are planning to grow opex slower than revenue, which -- obviously that's the math, but the question really is, it's within your control since there's variance in revenue growth up or down relative to your Horizon 2 fiscal '21-'22 outlook I -- are you planning to adjust opex accordingly or will you -- which leads? Does revenue lead or does opex lead?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Yeah, Paul, so what we've talked about is the 31% to 32% and that's what we are targeting. If we find opportunities for investment to continue to drive that revenue growth, we will make those investments. Having said that, we are committed to that 31% to 32% in FY '21 and the overall Horizon 2 outlook that we gave you as well as the long-term model. And so that's the way we are managing the business.

We are very excited to see the 10% growth this quarter and the 8.5% for next quarter implied in the midpoint of our guidance range. And those are both obviously above the Horizon 2 outlook and the factors that go into the Rule of 40, we ended up at 43 this quarter. And so we're really happy with that continued progress, but that Rule of 40 is the northstar that we continue to strive for within the business.

Paul Silverstein -- Cowen & Company -- Analyst

All right. I trust from your comments and Francois' comments that visibility today is better than it was 90 days ago, 365 days ago. So let me ask you to open the question, what is visibility today versus previous periods? Has it improved or is it just -- has remained solid?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

And I'm assuming you mean visibility in the pipeline and sales opportunities is the primary factor here.

Paul Silverstein -- Cowen & Company -- Analyst

Forward-looking metrics, correct.

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Yeah. I believe visibility continues to grow and be strong for us, Paul, and we're excited about the outlook that we've given you.

Paul Silverstein -- Cowen & Company -- Analyst

All right. I'll pass it on. Appreciate it.

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Okay.

Operator

Your next question comes from the line of Meta Marshall from Morgan Stanley. Please go ahead. Meta Marshall, your line is open.

Meta Marshall -- Morgan Stanley -- Analyst

Apologies. This might be circling around some of the other questions that were asked, but you alluded a couple of quarters ago that people were kind of heads down and it's COVID and that if they were buying physical editions before they continue to buy physical editions if they were buying virtual or they continued. You still plans about people kind of having a little bit more of a framework of what their hybrid architectures look like. But I guess I'm just trying to get a sense of, is there still a contingent of customers who are just kind of heads down and just trying to address the problems with their current architectures and that could be kind of looking at systems revenue for now?

And then just maybe some of d puts and takes on the lumpiness in the service provider revenue and just understanding some of that is project-based, but just maybe that tracking a little bit under traditional kind of percentage of revenue would be helpful. Thanks.

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Hi, Meta, let me start with the service provider. Our bookings in -- or demand in service provider were up year-on-year and we continue to see strong demand in 4G solution. We're seeing start of some capacity increases related to 5G, but we think the bigger kind of demand in 5G is probably still six to 12 months away. But generally -- so the trends in our service provider business has kind of continued as stable.

As it relates to customers in the enterprise and whether some of them are still not moving forward with some projects, yes, that is still the case. What we're seeing, Meta, is our incumbency in a number of customers and the fact that we're operationalized -- whether we're operationalized in hardware or in software is actually a significant advantage because we still see a lot of customers that continue to do incremental things and we'll come back to bigger transformational project later. And yes, in some ways because with a number of customers hardware is still a majority of our business. That does favor our hardware business in a way more than our software business.

Meta Marshall -- Morgan Stanley -- Analyst

Great, thanks.

Operator

Your next question comes from the line of Rod Hall from Goldman Sachs. Please go ahead.

Rod Hall -- Goldman Sachs -- Analyst

Question, I wanted to see if you guys could give us an indication of what you're thinking for services growth in Q2? And then I have a follow-up on that.

Frank Pelzer -- Executive Vice President and Chief Financial Officer

We didn't split it out specifically, Rod. I think it's going to be in those low-single digits. My guess is, it's higher than the 1% that you saw this quarter, but I'm not expecting it to be in the mid-single digits.

Rod Hall -- Goldman Sachs -- Analyst

So like you're at 3%, Frank something like that.

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Yeah, something like that.

Rod Hall -- Goldman Sachs -- Analyst

Okay. And then I wanted to come back and just clarify what you guys said in response to Paul on the organic software, maybe I guess the more direct question is, what the Volterra contribution would be in Q2, can you give us any idea on that?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

It's de minimis. We talked about less than $10 million for the full year when we discussed the -- announced the acquisition. And so it's going to be de minimis throughout, it's not a number that we're going to split out.

Rod Hall -- Goldman Sachs -- Analyst

Okay. And then finally, just another clarification. This $10 million that you guys talked about in Q1 and then I think Frank said -- or Francois you said it carried into Q2, but I wasn't clear, are you saying $10 million again in Q2 or I would assume some number less than that, but can you clarify what that number should look like in Q2 roughly for us?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Yeah, Rod, it's -- it was about 5 growth points in the quarter and it may be something similar to that. There is obviously a decline in revenue stream between Q1 and Q2 for systems on the product side, and so it's hard to say exactly, but it probably is a little less than $10 million, but I wouldn't say it's dramatically less than $10 million.

Rod Hall -- Goldman Sachs -- Analyst

And Frank, that falls to 0 after Q2, right? So it's just a Q1, Q2 phenomenon you think?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

I don't -- not giving guidance beyond that, but the date that we had given out was April '21 two or three years ago. So it could stretch beyond that for some customers this is generation -- two or three-generation old product. And so I don't know exactly when people are going to go through that upgrade cycle, but our guess is it's done mostly by next quarter in Q2.

Rod Hall -- Goldman Sachs -- Analyst

Okay, great. Thanks very much. Appreciate it.

Operator

Your next question comes from James Fish from Piper Sandler. Please go ahead.

James Fish -- Piper Sandler -- Analyst

Hey guys, thanks for the question. A little bit of -- on the guide and the results here. You said it wasn't budget plus a few weeks ago and talked about project deferral and increased app infrastructure investment. I guess could you in any way break out how much of it was project deferral from product quarters coming into the quarter here versus kind of increased activity in pipe around that app infrastructure investment versus frankly share gains?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Well, I think -- Hi, James. Look, I think the major drivers here are more around increased investments in application infrastructure driven by an acceleration of digital transformation and digital channels for all companies that is floating to application infrastructure and capacity additions. I think that's, I would say, is kind of factor number one.

I think our improved strategic position with customers and the fact that they are more comfortable moving forward with a hardware purchase with F5 knowing that we are also their partner for software that we're now also their partner for modern applications that we're also their partner for public cloud deployments and they don't see F5 as a single-threaded horse, if you will, that's just a hardware partner. That is also providing an opportunity for -- opportunities to move forward even in hardware.

I would say those are the two major factors. The catch up is just for some customers that had just try to wait out, if you will, the pandemic to do some refresh. Some of them are moving, but I would say that's less of a factor than the first two.

James Fish -- Piper Sandler -- Analyst

That's helpful, Francois. Last one for me and going off of Rod's question, obviously, it was announced couple of years ago, just making sure we should think about it as $10 million for fiscal Q2 or could it be more? And really, my question is, are there other systems over the next 12 to 18 months that are on a similar path that we should be reminded of?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Yeah. For fiscal Q2, James, you should think of it as $10 million or less than -- so we think it will be less than what it was this quarter, as Frank said, exactly where comes in it. And then, to your point around other systems that where there may be the same situation, there isn't any similar effect in the next 18 months.

James Fish -- Piper Sandler -- Analyst

Thank you. Congrats, guys.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Thank you, James.

Operator

Your next question comes from Jason Ader from William Blair. Please go ahead.

Jason Ader -- William Blair and Company -- Analyst

Yeah, thank you. Hey, guys, I'm just curious, do you -- would you say it's possible that the growth outlook for your ADC business is actually hit an inflection point?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Well, yes, I mean, I think as we discussed earlier, while we are not changing our overall view for Horizon 2 of an overall growth of 7% to 8%, if you look at the recent trends, it's possible that we're going to see on our systems business a better trend than what we anticipated in our Horizon 2 guidance.

Now I will remind you that when we laid out our Horizon 2 guidance and the drivers of growth for F5 that are driving the 7% to 8% growth, there were three substantial drivers. The first one is continued momentum in software and software subscriptions and we are continuing -- I mean we posted 70% growth year-on-year this quarter and we're going to continue to see very strong growth in software because the flywheel of subscription that we've put in motion now two and a half years ago is really, really working well for us as a motion and for our customers.

The second driver is demand for application security and we're seeing that also being very strong boosted by the addition of Shape and the use cases that I've talked about. And then, the third driver was a moderation in our systems declines and we had said that the timing would moderate from double-digit to high-to-mid single digit decline. Now we felt when we put the guidance together that not all three of these things have to go -- had to go perfectly for us to achieve the 7% to 8%, so we have multiple paths of getting there. And right now, in the first quarter, essentially there -- all three are pretty much going very well. So if that continues, I hope there is a possibility we do better than what we thought. And right now, specifically in hardware, the trends are pretty strong.

Jason Ader -- William Blair and Company -- Analyst

And what was the -- can you remind us, what was the kind of organic growth excluding the three acquisitions? What were you telling us on what that could grow in Horizon 2?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

The growth for Horizon 2 was 35% to 40% for all software and the only component of that -- pre-Volterra, of course that was organic was just one quarter of Shape, which was the quarter we just had, the first quarter. Everything else was organic.

Jason Ader -- William Blair and Company -- Analyst

Okay. So, I guess, what I was asking is the kind of the non-NGINX kind of ADC business that was going to be flat to slightly up. I mean, could the outlook for that be more something like mid-single digit growth going forward?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Yeah, we don't break that -- the answer is no, it was going to -- it wasn't going to be flat, it was going to grow much faster than that, but we don't break out specifically the software growth percentage of BIG-IP versus NGINX. Frankly, pleasingly, as I shared earlier, those solutions are actually viewed in the same subscription agreement to support customers that are -- that have traditional and modern applications that meet the scale and so they have become increasingly synergistic and kind of driving growth for one another. But the software growth number that we shared, including BIG-IP, NGINX, Shape as part of our security portfolio.

Jason Ader -- William Blair and Company -- Analyst

Okay, thank you.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Thank you.

Operator

Your next question comes from Samik Chatterjee from JP Morgan. Please go ahead.

Samik Chatterjee -- J.P. Morgan -- Analyst

Hi, thanks for taking my question and squeezing me in here. I guess Francois, from what I hear -- read into your comments here, it does sound more like what you're seeing is you didn't really need kind of software systems and services to kind of fire on all cylinders, but given where you are today in the first half, you would exceed the 7% to 8% Horizon 2 revenue growth target this year, if things continue this way. And so, I just wanted to confirm that's what you're implying? And then, if you can think me -- help me think about sustainability of that higher than kind of 7% to 8% growth rate into next year given the momentum that you're seeing in the business. And I have a follow-up. Thank you.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Samik, I think, just to be clear, we're not changing our guidance for Horizon 2 of 7% to 8% that remains our view on Horizon 2. If we're speaking specifically about FY'21, Samik, if you look, clearly in the first half our expectation, if you look at the midpoint of guidance for Q2 is we will exceed the 7% to 8% just on the basis of the first half. And frankly, if the trends that we're seeing right now were to continue, there's a possibility we could exceed that as well for FY'21, but we're not guiding for FY'21.

If you are asking about the underlying drivers that I see in the business for growth, I think the drivers we're seeing for both software and security are very strong and very sustainable. And in hardware, some of the drivers we're seeing that I've talked to, are actually sustainable. There is a change there that we're seeing in how customers are approaching deployment of traditional applications in this hybrid cloud environment and the place that they're giving F5 in their go-forward plans and the strategic position we occupy now, I think that is sustainable. There are couple of things that I think are transient that are not. And so, how much of that will play out in terms of FY'22 and beyond, it's really too early to say that now.

Samik Chatterjee -- J.P. Morgan -- Analyst

Okay. And then, a quick -- no, thanks for that. And a quick follow-up here for Frank. Frank, can you -- I'm calculating about a $25 million opex increase from 1Q to 2Q, can you clarify how much of that is from Volterra?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Yeah, not splitting it out specifically, but I would say it's in the sort of single digit millions. So I would say mid-single digit millions would be probably more accurate, but the -- those -- that's something that we're not going to expect to sort of split out going forward, it's just too de minimis in terms of the total number.

Samik Chatterjee -- J.P. Morgan -- Analyst

Okay, OK. Great, thank you. Thanks for taking the questions.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Yes, thank you, Samik.

Operator

We will take our last question today from Amit Daryanani from Evercore.

Amit Daryanani -- Evercore ISI -- Analyst

Yeah. Thanks a lot for letting me squeeze in, guys. I guess maybe just on the systems side, I know it's been discussed a bit, but given everything you've talked about, which is not all the stuff that was held up last year is back yet, and I would imagine that perhaps the share gain narrative that hasn't been talked about could be somewhat powerful as well, could we see a scenario where that systems business actually accelerates in the back half of the year? If not, I guess, what are the caveats to that statement?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Amit, I didn't catch the last part of your question. The first part is, could we -- could the systems business accelerate, what was the second part?

Amit Daryanani -- Evercore ISI -- Analyst

Yeah, I guess if I think about all the stuff that was held up last year that still has to come back into the funnel plus the share gain potential you could have in terms of just picking up a little bit more share. I would imagine that systems business could accelerate as we go through fiscal '21 and so just what would be the caveats or the reservation from that dynamic?

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Well, Amit, it's a good question. Look, I -- the way I would think about this is, if you look at the kind of long-term trends for F5 and where we're going to be as a company in the long-term, and we have said for the long-term with the acquisition of Volterra now, we expect to grow double-digit in the long-term. That's going to be driven by software, software subscription and SaaS. We don't expect our hardware business to be a growth business going into the future. So that's our view of things and there is nothing that has happened in the last three months that would make us fundamentally change that view of the long-term.

Now, in the short-term, will it accelerate beyond what we're seeing in the second half of 2021? That's unlikely, but we're not going to rule it out given what we're -- given the dynamics that we're seeing with our customers today.

Amit Daryanani -- Evercore ISI -- Analyst

Got it. And if I could just clarify this. The modest or the deceleration that you're talking about in the software business, in March versus December, is that just a reflection that your compares are very difficult in the March quarter? Or is there something else you would call out that's driving that modest decel again?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Now, that's what we called out and that's our feeling. And it's just a much longer comp that we had in Q1.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Yeah. And it's -- the harder comp -- because we -- as a reminder, Amit, we had last Q2, I think growth rate was 95% or 96% year-on-year, so you have a harder comp. But the underlying dynamics and drivers for software demand are very strong across NGINX, Shape, subscription agreements and the momentum we're seeing there and general security. So that we are very confident that it's going to continue to pick up.

Amit Daryanani -- Evercore ISI -- Analyst

Perfect. That's it for me. Thank you, very much.

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Thank you.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Suzanne DuLong -- Vice President, Investor Relations

Francois Locoh-Donou -- President, Chief Executive Officer and Director

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Sami Badri -- Credit Suisse -- Analyst

Alex Henderson -- Needham & Company -- Analyst

Tim Long -- Barclays -- Analyst

Paul Silverstein -- Cowen & Company -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

James Fish -- Piper Sandler -- Analyst

Jason Ader -- William Blair and Company -- Analyst

Samik Chatterjee -- J.P. Morgan -- Analyst

Amit Daryanani -- Evercore ISI -- Analyst

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