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F5 Networks Inc (NASDAQ:FFIV)
Q2 2021 Earnings Call
Apr 27, 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 Second Quarter Fiscal 2021 Financial Results Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] If anyone has any objections, please disconnect at this time.

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

Suzanne DuLong -- Vice 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A copy of today's press release is available on our website at f5.com where an archived version of today's call will be available through July 25, 2021.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. To access the replay of today's call by phone dial (800) 585-8367 or (416) 621-4642 and use meeting ID 3461547. The telephonic replay will be available through midnight Pacific Time, April 28th. 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.

With that, I'll 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. I am pleased to be with you and to share with you our strong Q2 results. With second consecutive quarter of 10% revenue growth and double-digit non-GAAP earnings growth in Q2, we are outperforming both our revenue and EPS goals.

It is important to note that we achieved Q2 strong results with a different revenue mix than we expected early in the quarter. We delivered exceptional systems growth of 17% while software growth was more muted than our expectation at 20%. During this call, we will discuss the market dynamics behind our product revenue mix in the quarter.

The transformation we have worked persistently to achieve has put us at the center of applications both traditional and modern with a truly multi-cloud approach. As a result, we are benefiting from strong and sustainable macro growth drivers, ultimately powered by application growth. Business and consumers' increasing reliance on applications has accelerated all prior expectations about the pace of digital transformation. Our customers across the globe are scaling the digital assets faster, resulting in growing demand for F5 application security and delivery solutions.

With our strong overall results, our conviction in our opportunity both short and long-term is stronger than ever, driven fundamentally by accelerating application growth. We feel very good about our future given robust demand drivers and our strong and differentiated market position.

I will turn the call over to Frank to walk you through our Q2 results and our Q3 outlook. Frank?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Thank you, Francois, and good afternoon, everyone. As Francois just outlined, our team delivered another very strong quarter. Second-quarter revenue of $645 million was up 10% year-over-year and at 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.

Q2 product revenue of $309 million is up 18% year-over-year, representing a significant acceleration from 10% in the same period last year and even more so from flat growth in the second quarter of fiscal 2019. Product revenue accounted for approximately 48% of total revenue, up from 45% in the year-ago period. The progress we are making driving double-digit product revenue growth and the increasing mix of product revenue as a percentage of our total revenue are both strong indicators of our transformation momentum in the long-term health of our business model.

As Francois noted, we are seeing stronger-than-anticipated demand across the board. Short term, more of that demand is coming from systems leading to the quarter's product revenue mix. Systems revenue of $201 million is up 17% percent compared to last year when systems were down 11%. Systems demand was higher than anticipated in the quarter, largely from a broad-based increase in application usage and the corresponding increase in application traffic continued growth of systems-based security use cases as well as the emergence of 5G-driven service provider demand.

Against a particularly tough 96% growth comparison in the prior-year period, Q2 software revenue of $108 million is up 20% year-over-year representing 35% of product revenue. We continue to drive our transition to a subscription-based model, delivering record subscription volume in Q2 with subscriptions representing 79% of software revenue in the quarter. This is up from 73% in the year-ago period.

Finally, our global services revenue of $336 million is up 4% compared to last year, representing 52% 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 64% of revenue in the quarter.

On a regional basis in Q2, Americas delivered 6% revenue growth year-over-year representing 54% of total revenue. Our EMEA and APAC teams drove strong growth in their regions, with EMEA delivering 16% growth, representing 27% of revenue, and APAC, delivering 15% growth, accounting for 20% of revenue. The quarter strength spanned customer verticals with especially strong demand from enterprise and telco. Enterprise customers represented 68% of product bookings. Service providers and government customers each represented 16% of product bookings including 6% from U.S. Federal from within the government vertical.

Let me now share our Q2 operating results. GAAP gross margin in Q2 was 80.1%. Non-GAAP gross margin was 83.4% reflecting higher systems revenue as well as higher levels of managed service solutions and our usual Q2 seasonal decline in global services margins. GAAP operating expenses were $463 million. Non-GAAP operating expenses were $342 million reflecting our usual Q2 operating expense seasonality and the addition of two months of Volterra-related operating expenses.

Our GAAP operating margin in Q2 was 8.3% and our non-GAAP operating margin was 30.3%. Our GAAP effective tax rate for the quarter was 17%. Our non-GAAP effective tax rate was 20.2%. GAAP net income for the quarter was $43 million or $0.70 per share. Non-GAAP net income was $155 million or $2.50 per share.

I will now turn to the balance sheet. We generated $128.5 million in cash flow from operations in Q2. Cash and investments totaled approximately $662 million at quarter-end, reflecting both the cash used for the Volterra acquisition and the initiation of a $500 million dollars accelerated share repurchase program. As a result of the ASR, we retired approximately $400 million of shares in Q2, reflecting 2.1 million shares purchased at an average price of $194.91 per share. We expect the remaining $100 million of ASR-related shares to be retired early in Q3.

DSO was 52 days and capital expenditures for the quarter were $9 million. Deferred revenue increased 7% year-over-year to $1.4 billion. We ended the quarter with approximately 6,360 employees, up approximately 200 from Q1, in part as a result of the Volterra acquisition.

Now, let me share our guidance for our fiscal third quarter. Unless otherwise stated, please note that my guidance comments reference non-GAAP metrics. 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.

It will come as no surprise that like others in the industry, we are seeing some tightening in our supply chain. Thus far, our team has navigated it well, particularly given stronger-than-anticipated systems demand. Obviously, this is an industrywide challenge and like others, we have mitigation efforts in place and we'll be watching it closely. With that as context, we are targeting Q3 fiscal year 2021 revenue in the range of $620 million to $650 million.

We have accounted for the reduced supply chain visibility with a wider revenue range for our Q3 outlook lowering the bottom end of our range by $10 million. While we do not expect to routinely provide product revenue mix guidance, we expect software growth for fiscal year 2021 will be at or around 35% implying software growth in the back half of '21 exceeding what we delivered in Q2.

Near term, we expect continued system strength with a slower growth rate likely in the fourth quarter. We expect Q3 '21 gross margins of 84% to 84.5% and we estimate operating expenses of $338 million to $352 million. We also expect to achieve our fiscal year 2021 non-GAAP operating margin target of 31% to 32%. We anticipate our effective tax rate for the year will be approximately 21%. Our Q3 earnings target is $2.36 to $2.54 per share. We expect Q3 share-based compensation expense of approximately $63 million to 65 million.

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

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

Thank you, Frank. The big takeaway from our Q2 results is that across the globe, our customers are experiencing a pronounced growth in application traffic, which in turn is driving increased opportunity for F5. Customers across geographies and verticals are experiencing application demand well ahead of initial expectations and timelines. This escalating demand is coming on the heels of a prolonged period of sweating assets in anticipation of cloud modernization efforts, and more recently, pandemic-induced investment reprioritization.

With no signs that application usage will slow, customers are urgently working to ensure they are able to support application traffic growth. The result for F5 is strong and sustainable overall demand for application security and delivery, as well as a temporary change in customer buying behavior evident in our Q2 product revenue mix. I will stress that while we believe the opportunity around application demand is a long-term one for F5, we expect the current trend favoring hardware-based delivery models is short-term. There remain a durable preference for software and SaaS-based application security and delivery that will once again be evident in our results over the next several quarters.

So let us dig into the quarters' demand drivers. I will frame my discussion with the three growth drivers we discussed at our November 2020 Analyst Day. One, ongoing software and subscription momentum, two, systems-based demand, and three, growing demand for application security in both software and systems form factors.

We continue to see rising demand for application security, and increasingly, F5 is seen by customers as an application security leader. In fact, Q2 was our highest security quarter yet with strength spanning both systems and software form factors across both traditional and modern applications. Where application security is threaded through virtually all of our customer interactions both software and systems, for the purposes of the discussion today, I've highlighted security use cases throughout both the software and systems form factor discussions.

I will start our discussion with our software and subscription momentum anchored on trends we are seeing with application-driven demand. Our growth in modern applications continues to accelerate driven by NGINX container and cloud native deployments. We are seeing several top use cases emerge for NGINX including API Gateway, Kubernetes synchronous controller, and software-base load balancing.

Customer's modernization efforts and the availability of NGINX controller and enterprise level app security with NGINX App Protect are also driving larger NGINX deal sizes as we anticipated. In one example, our sales team successfully layered NGINX controller with NGINX App Protect to enable one of the largest digital product companies in APAC to modernize more than 40 digital properties replacing multiple competitors with NGINX Plus, with App Protect, and controller. As a result, the customer got a much better ROI in a long term subscription framework.

Customers are also increasingly aware and appreciative of NGINX's extreme versatility. For instance, during the quarter, we secured an NGINX win with a regulatory body in APAC. The customer was facing two distinct challenges. First, they needed to refresh their electronic payment systems, and second, they needed to deploy microservices in a VMware Tanzu Kubernetes environment.

NGINX proved the ideal solution for both. In the first instance, the customer moved from NGINX open source to NGINX Plus for the additional functionality and the added benefit of world-class global services support. In the second, they opted for a flexible subscription agreement, which gives them the ability to scale NGINX both as a software ADC and as a Kubernetes ingress controller as they grow their microservices. And they are using controller for visibility and manageability across both use cases. Of note, NGINX was the only true multi-cloud solution they found able to work in both a VMware environment and the cloud.

With pronounced application growth and an ever expanding threat landscape, we also see continued demand for application security in cloud environments and rising demand for fraud and bot defense. With our Shape anti-fraud and anti-bot solutions, we are learning our win rate is best when there is significant automated traffic that can often circumvent traditional WAF protections. This is Shape's sweet spot. As an example, during Q2, a large credit union faced a massive credential stuffing attack, which their existing WAF could not defend, Shape could and did.

While momentum in NGINX and modern application security software use cases increased in Q2, we experienced a notable shift in customer's delivery preferences for application security and delivery for traditional workloads served by BIG-IP. We continue to see growing demand for BIG-IP software in multi-cloud environments and expect the resumption of large-scale modernization efforts will remain a powerful growth driver for BIG-IP over time.

Short-term, however, we saw a mitigating factor to BIG-IP software demand which paradoxically was driven by continued application growth. Facing escalating application traffic, several customers opted to refresh and augment their existing infrastructure instead of transitioning to software or a cloud environment. When asked, they explain that the systems form factor offered an expedient way to get the urgent capacity their applications and users needed in a well-operationalized deployment motion. While cloud modernization and expansion are most certainly part of their future plans, they chose to deploy systems now. We expect this pattern with BIG-IP software is temporary and will moderate in the fourth quarter as customers resume BIG-IP software purchases in support of longer-term strategic projects and modernization efforts that COVID working conditions have made challenging.

Stepping back, we continue to drive very positive software trends in the business. Our software subscription momentum continues with 79% of Q2 software revenues coming from subscription-based sales, up from 73% in the year-ago quarter. In terms of volume, the number of multi-year subscription agreements were up 32% quarter-to-quarter and more than 200% compared to last year.

In addition, while it is early still, we are beginning to hit some multi-year subscription renewals and we are also seeing positive signs there. During Q2, we achieved a 100% renewal rates on the long-term subscription agreement that expire in the quarter. In addition, 75% of those renewals grew over prior levels. While we have yet to hit the inflection point for renewals, we are very encouraged by these early data points. In addition, we continue to see utilization improvements. Our Q2 customer success metrics show long-term subscription customers are achieving 100% utilization sooner than ever before.

Turning to systems. Part of F5's value proposition is our ability to offer our customers enterprise-grade application security and delivery solutions in multiple form factors, systems, software, and increasingly going forward, SaaS. As I just discussed, sudden and rapidly accelerating growth in application usage led to accelerated customer demand for systems in Q2.

Last quarter we articulated several systems demand drivers. Another quarter in, we believe we have additional clarity around the drivers of our systems growth and we can break them into two broad categories. One, accelerating application traffic, and two, security, including emerging 5G-driven demand. To a large extent, I have already spoken to the accelerating application traffic. With surging application consumption, customers have a urgent capacity demands to fulfill. As a result, several customers are opting to refresh and augment their infrastructure at a faster rate than we anticipated. Of note, they are doing so without a new systems platform from us. In some cases, the deployments coincide with the end of software development date we discussed last quarter, but broadly speaking, the underlying driver is the need for application security and delivery capabilities to deal with escalating application usage.

We are seeing demand spend, geographies, and customer verticals from financial services to technology to global SaaS providers. As a case in point, one of our biggest systems deployment this quarter was with one of the planet's largest cloud-based software companies looking to build a scale model for organic growth and they scale within their existing systems architecture. Similarly, last quarter, we had a sizable systems deployment with one of the largest tech giants in support of their global web-based collaboration platform and they scale with their existing systems architecture.

These are cutting-edge players and in all likelihood, they will be among the first to move to software and cloud-based infrastructure in the future. However today, because of the confluence of demand, the complexities of deploying and scaling in the cloud, and the challenges of taking on transformative projects in a COVID-influenced environment, they are solving their application and delivery challenges with systems from F5.

Wrapping up our growth drivers discussion, let's talk about system-based application security, including a new driver, emerging 5G demand. As we have said for several quarters now, our systems business is benefiting from increasing demand for security use cases. Cross-sell of application security is driving systems growth as more customers look to consolidate vendors and combine ADC and application security functionality.

Among enterprise and government customers, we also are seeing strong demand for web application firewall and continued strength in identity and SSL orchestration. The new driver that developed this quarter is emerging service provider 5G demand. We expected that as 5G traffic begin to flow from the radio edge into service providers' 4G core networks, we will benefit from increased demand given our strong position in 4G Gi LAN infrastructures. We initially and conservatively, estimated 5G-related demand would begin to materialize into late 2021 or early 2022.

In Q2, we secured several Gi LAN expansion projects, including a large Gi LAN firewall expansion with a North American carrier. These wins and other active opportunities suggest that we are in fact beginning to see the emergence of 4G core expansion, driven by 5G demand.

So what does all of this mean for our business and growth going forward? Fundamentally we expect customers to transition to more software and SaaS-based solutions over time. We are confident that the investments we have made, both organic and inorganic, and forward momentum our teams are driving position F5 as a significant beneficiary of that transition. This is true in the short term as Frank said, we expect our software growth in fiscal year 2021 to be at or about 35%. And it is also true in the long term as software and SaaS-based revenue accounts for more sizable portion of our total revenue.

We expect the demand for application security will continue to grow as application demand grows and customer scale and modernize their applications. We believe that we are exceptionally well-placed with the right perspective and toolsets to solve our customer's most pressing application security challenges. Our opportunity in application security is even more exciting with the ongoing integration of F5 and Volterra, which will bring enterprise-grade F5 application security through the edge in an easily deployable SaaS model.

We expect the recent high growth rates we have seen for BIG-IP systems will begin to moderate in the second half of this year. And we expect service providers' 5G-related demand will likely begin to migrate from systems to software in 2022 and their 5G cohorts start to hit production. In the meantime, we see demand for systems-based application security persisting over multiple quarters.

Before I close our prepared remarks, I will say a few brief words about Volterra and our integration process. We launched our integration and value creation efforts immediately following the acquisition close on January 22nd. We are thrilled to have Ankur Singla and the Volterra team as part of our security organization led by Haiyan Song.

While we have work ahead, we are very pleased with the initial positive customer response. Early indicators show our vision of F5 Edge 2.0 is resonating with customers. We have started a pilot program concentrating on specific use cases and focused on bringing F5 security to the edge with the goal of leveraging Volterra's organic momentum and early customer interest. Through this pilot, we will develop new business as well as the right customer behavior insights.

As the first step in our long-term integration of F5 solutions and Volterra's platform, we have begun the process of strategically and methodically combining our best in web application and API protection security offerings and Volterra's innovative platform. We are also formulating our go-to-market approach and exploring ways to maximize the benefits with our channel partners. Only a few months into this integration, we are even more excited about the potential of this combination as we move into FY '22. We will continue to share our progress with you in the coming quarters.

I will wrap up today's prepared remarks by thanking the entire F5 team again, as well as our customers and partners. In particular, our thoughts are with the F5 team in India, their families, and loved ones as they endure the extreme health risk and loss of life occurring there as a result of the current COVID-19 outbreak.

With that, operator, we will now open the call to Q&A.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from James Fish from Piper Sandler. Hey, guys. Thanks for the question here and appreciate all the details. Francois, you really talked a lot about the near-term benefits on systems and the expectation for it to get software bookings later on in the year. Are there deals already engaged for that cross-sell opportunity of say, NGINX and other parts of software that you can point to that's already happening? And maybe, Frank, is there any way to quantify, last quarter, we heard about roughly $10 million impact in the end of developments. Was there another kind of $10 million this quarter kind of pulling the demand or no?

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

Hey, Jim. Thanks for the question. The short answer is yes. There is -- we have a strong pipeline of software deals both for NGINX and for BIG-IP that will materialize in the second half of the year. What we did see this quarter, so if you look at the software growth drivers, Jim, we talked about three growth drivers on software and in that order, one is modern applications, second one is security, and the third one is BIG-IP deployments in multi-cloud.

The first growth driver around modern applications is going very well, largely driven by NGINX exceeding our expectations and driven by the addition of a controller and security on NGINX and more and more customers deploying modern applications in these cloud-native and container-native environments. The second driver of security also going to plan with more and more customers deploying security either in these modern application environments or on top of traditional applications both in systems, but also in software form factors. The third driver of software growth is really the deployments of BIG-IP into multi-cloud environments and specifically some customers migrating from systems to software-first or cloud-first environments.

And while we see continued growth on those BIG-IP deployments, what we did see this quarter is a bit of a moderation as on that specific driver, as customers that really need to increase the capacity to support application usage and application growth, a lot of them chose the most expedient way to deploy that capacity which is in hardware whether operationalized and don't have the -- either the time or the mechanism right now because of the COVID environment to go and think about rearchitecting things and moving to software. We do think that that will resume in fairly short order. So we're very confident about the software growth both for the second half of the year and for 2022.

Frank Pelzer -- Executive Vice President and Chief Financial Officer

And, Jim, specific to your second question, I think the end of software development cycle that we saw in the beginning of April, that was one trigger but it's really hard to split out exactly dollar wise what was the drivers for everything. I think the others that we have to include in there are the capacity expansion that Francois spent a lot of time talking about in the prepared remarks, customer's depreciation schedules and then just their inability to continue to sweat the assets that they have probably for a couple of years now, some reprioritized budgets and a few other factors. If I had to quantify it, I think it's probably about the same as it was last quarter. But there are a lot of other factors that went into the strength of hardware.

James Fish -- Piper Sandler Companies -- Analyst

Yes, I totally understand. Appreciate that. Just one more follow-up from me if that's all right. Obviously, a lot of major breaches occurred before you reported last time and really that pipeline haven't had a chance to necessarily build too much. I guess what are you guys seeing, obviously, you're talking some really good security results on including the carrier side, not just the enterprise side. But I guess anything to call out regarding that security pipeline for WAF given what happened with those breaches and are there areas of security you guys might look to expand into to kind of bolster the portfolio overall?

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

Hi, Jim. Is your question specific to WAF?

James Fish -- Piper Sandler Companies -- Analyst

Yes.

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

Okay. So on -- and specifically on web application firewalls, Jim, we continue to see good traction there. It's one of the most in-demand use cases from our customers. We have seen that traction this quarter happen both in hardware form factors either in stand-alone form factor or with customers sometimes bundling that with ADC. We also see demand for web application firewall in these modern application environments and we're really pleased to see the traction with NGINX App Protect, which as you know is that effect we're seeing of having made the decision to port our security capabilities onto NGINX shortly after the acquisition. That's gaining a lot of momentum now, so wo we're getting embedded for security.

And we also see that with the portfolio on the web application firewalls, application security, in general, API protection, DDoS protection, and bot management and mitigation. Those are really the areas of application security we're placing focus and significant investment for the near future.

James Fish -- Piper Sandler Companies -- Analyst

Thanks.

Operator

Your next question comes from Meta Marshall from Morgan Stanley.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks. Maybe a couple for me. Just on the -- first, is there an organic software growth number that we have for year-over-year I guess, just excluding kind of the two months of Volterra that would have been included. And then -- and just maybe on kind of extrapolate on the last question, but just as you're deepening conversations in sales to encompass kind of more than one product, just what are you kind of seeing as far as sales cycles for cross-sell opportunity versus maybe a point product?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Yes. So let me take the first one and then I'll let Francois take the second. I think we talked about we were not going to split out Volterra because it is rather immaterial and I mean super immaterial, especially this quarter with only two months. And so, I -- it's not enough to remove a growth point. And so, I would just say it's rather immaterial to the results of the operation. It becomes a critical asset for us, particularly in the out years and we're really, really excited by of the excitement that we've seen within the customer base and our sales force already. But in terms of actual revenue results, really nothing to speak of from Volterra. But I'll let Francois address the other.

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

Yes, in terms of cross-sell opportunities, a couple of things. Where we are really pleased is we are seeing more and more customers of F5 adopt multiple elements of our portfolio. And so more and more of the multi-year term subscription agreements that we are selling have multiple products from F5 and it's allowing us to elevate the conversation with our customers, really continue to elevate the position of F5 in a lot of these large accounts, and we're really pleased with the traction of these agreements. In fact, as a data point, the software multi-year subscription agreements were up 200% year-on-year in terms of the volume of transactions that we completed this quarter relative to Q2 of 2020, and this points to the number of our customers that are moving to these term subscription agreements where they can easily consume multiple of our products.

In terms, specifically of our progress on the new point solutions. I think Volterra is too -- it's really too early for us to speak to that because we're basically still through the integration, porting our capabilities onto the Volterra platform including our security. So it's more over the next few quarters that we'll be able to speak to deals that are coming through on Volterra.

And then on Shape, specifically where we are, pleased with the value proposition. I mean, the customers that use Shape are extremely pleased with the efficacy of the solution, it is best in class. A lot of times, we see customers who are -- actually already have solutions perhaps from another vendor like a CDN vendor but they're still under attack and we come in with Shape and have a higher efficacy solution and can solve those attacks as a point solution.

Where we are seeing things take longer than we would have liked is in the COVID environment, when you have to go through a proof-of-concept, mechanically, it's actually difficult to go through it. And we're finding that in this environment, being incumbent and operationalize the big advantage but when you're trying to introduce a new solution that requires a proof-of-concept, the sales cycle's a bit elongated and it takes a little bit of time. I would say that overall the picture on cross-selling the various elements of the portfolio.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. That's helpful, thanks.

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

Thank you, Meta.

Operator

Your next question comes from Sami Badri from Credit Suisse.

Sami Badri -- Credit Suisse Group AG -- Analyst

Hi. Thank you for the question, and congrats on the solid results. The -- Francois, in your prepared remarks, you talked about escalating demand, you talked about some of these other tailwinds including 5G, security, and just service providers going forward. But I guess I think the big question that we have is as you've seen these incremental big drivers start to come in and how that actually impacts the full-year guide, is there a reason why you guys aren't in the perfect position yet to increase the Horizon 2 guide points at this point or is there a reason why you're being a little bit more conservative about the growth outlook and why not to increase the outlook?

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

Yes, Sami, I think there are a couple of things. We are -- Horizon 2 is as you know an eight-quarter period. We are two quarters into into that. So generally, we feel it would be really early to make any change to our Horizon 2 guidance. But I think the -- what we can say is a couple of things. We are definitely seeing those trends of application usage go up significantly as a result of most of us frankly consuming more things online, and so more and more of our customers see more usage on their application whether they are traditional enterprises or even cloud providers. As you know we are embedded in SaaS provider stock or even cloud providers. I think you've heard me say before that somebody's cloud is somebody else's data center. And we are demand for their solution and they have to pay as a result, and we're benefiting from that directly.

We definitely say that our hardware for 2021 will be in positive growth territory for sure given what we've seen. And even for Horizon 2, the performance of our systems will be materially better than what we thought it would be at the beginning of the Horizon. I think those are the things we can say. There is a little bit of uncertainty we're dealing with the supply chain challenges that all vendors I think are seeing at the moment. So we're a little cautious about that and we share in the prepared remarks, I think Frank shared that we took that into account a little bit in our guidance range. But in terms of the underlying demand, it is very strong.

Sami Badri -- Credit Suisse Group AG -- Analyst

Got it. Thank you for that. And then I just wanted to visit U.S. federal demand. The presidential administration's been very active to raise a secure fund and modernize a lot of infrastructure. Are you -- you guys came in I think relatively in-line on your number for U.S. federal in fiscal 2Q. But when we think about the rest of the year and how things are going with U.S. federal, can you just give us a bit of an update in terms of how that is looking, just so we can get an idea?

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

I think, Sami, on -- we don't see a fundamental change in the demand trends but WAF business has been pretty strong and we expect it to follow kind of normal patterns given what we see in the pipeline today.

Sami Badri -- Credit Suisse Group AG -- Analyst

Got it. Thank you. Thank you, Sami.

Operator

Your next question comes from Tim Long from Barclays.

Tim Long -- Barclays plc -- Analyst

Two questions if I could. First, could you talk a little bit about the cloud vertical which broke out last fiscal year, I think it's $100 million? Can you just give us an update how growth has trended in that vertical, that piece of the business? And then second on the software ramp for the second half of the year. It sounds like visibility is pretty good. Could you just give us a little more color, after a few quarters of kind of flat, it looks like a pretty big dollar growth. Are we to expect some ELAs or anything like that in the numbers to help the sequential revenue increases given that most of it's going to be on subscription? I would assume if not, you'd need kind of a big scale of subscription deals. So any color you can provide there would be helpful. Thank you.

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

Thank you, Tim. So let me just start with the second part of your question on software growth in the second half and then I'll come back to the first part. On the -- so in terms of the second half of the year in software, Tim, there are number of catalysts and drivers that have continued to gain strength and I talked about NGINX a little earlier, but these modern apps environment we see them continue to grow. We have in fact a number of subscription agreements in the pipeline, but I would say the predominant factor is that the volume of software, multi-year subscription agreements that we are signing is just growing extremely rapidly. They grew -- sequentially from Q1 to Q2, they grew roughly 30%. But if you look at it on a year-on-year basis, the volumes of subscription agreements was up 200% and it just continues in that direction.

So we're getting visibility to this. At some point, we're going to hit also the inflection point on renewals of these subscription agreements. We're not quite there, we think that's more of a 2022 effect. But even what we're seeing today from the renewal rates of the ones that are coming to term and the true forward on the ones that have more than a year of maturity, those metrics are just excellent at the moment. So these catalysts are important. Security continues to be a growth driver and a catalyst for growth in software.

And then the cloud, and I want to come back to the first part of your question. The cloud continues to be a growth driver for our software. However, this quarter, it was a little less in terms of the growth rate. And the reason for that is because we think that there was a moderation in the number of customers migrating applications to the public clouds and specifically migrating more of these traditional applications for the cloud. And we think this is back to the effect we're seeing on our hardware business where customers really sweated their assets for a long period of time saying, hey, we don't want to deploy any more hardware because we're going to migrate to the cloud. And what we're finding is a lot of them after having sweated their assets for a long time are caught with increase in the capacity needs that they have to serve very quickly and the -- operationally, the best and the easiest way to do that is to actually go with hardware.

And so, that we think -- and when you factor on top of that the fact that we're in a COVID environment that's moving from hardware to software or moving from hardware to cloud requires either rearchitecture or working in collaboration across multiple teams, which is much more difficult so they're unable to do that at the moment. We think over time, [Phonetic] but this quarter it was a little more muted.

Tim Long -- Barclays plc -- Analyst

Okay. Thank you, very much.

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

Thanks, Tim.

Operator

Your next question comes from Samik Chatterjee from J.P Morgan.

Samik Chatterjee -- J.P Morgan -- Analyst

Hey, great. Francois, just wanted to first start off with the implications of the reprioritization of spending that you were talking about toward a bit more systems. But you also talked about the 5G spend. Now as you put both of those together and think about the longer term, is the outlook still for systems to decline in that mid-single-digit range or does some of this reprioritization, the increase in 5G, does that change overall how you think longer term about systems? And have a follow-up.

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

Hi, Samik. Depends on what you mean by longer term. So I'm going to speak within Horizon 2, Samik. As I said before, I think 2021, we'll see for the full year our systems business will grow, and for the combination of 2021 and '22, I think performance for systems will be better than what we had anticipated at the beginning of the Horizon, which was high-to-mid single-digit decline, I think it'll be materially better than that.

In terms of what this means longer-term, frankly, it's too early to predict beyond Horizon 2. I would say in terms of the hardware ADC space, we think hardware ADCs per se, those are in secular decline and should decline and continue to decline over time beyond Horizon 2. We're not seeing that in hardware security today. We continue to see growth in hardware security and that represents more of a mix for us. So we'll -- too early to make a determination in terms of what's happening beyond 2022.

Specifically when it comes to service providers, what we are seeing, Samik, is right now, a lot of carriers have foot in place, their 5G radio as you know, the first smartphones with 5G have come out in the fourth quarter of 2020, a lot of the spectrum auctions have happened. And so we're now starting to see utilization of 5G from the devices into the radio and that is coming into the carrier core networks. Now, most of these carrier core networks are still 4G and we have a very strong presence in a lot of these infrastructure. And so the capacity requirements are fulfilled by 4G capacity upgrades and that's providing tailwind to our hardware business. And I expect that to continue for the next couple of quarters, probably a little longer.

Now, if you go into 2022, a lot of these carriers will start to put in production their 5G core and those are virtualized. And so, that opportunity will turn into a software opportunity for F5 and we have already won significant design wins for these 5G cores and we're in the process of doing First Office Applications and pilots and things like that before going into production in the next six to 12 months. So it's a hardware expansion opportunity today and over the next 12 months, it will move to be a software opportunity in 5G cores for F5.

Samik Chatterjee -- J.P Morgan -- Analyst

Okay. Got it. Francois, just as a follow-up. Looking at the growth trends across the different geographies, I'm just trying to get a better sense of the variability we are seeing, like Americas was a strong growth -- strongest growth geography for you last quarter. It's moderated significantly in terms of the growth rate while still growing, whereas EMEA and APAC aren't driving the growth this quarter. Is it like something on the ground that's impacting it in terms of like sales force, etc., like what's really driving that amount of variability in the performance by geography?

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

There isn't really anything of note. I would say the service provider vertical, we had some important expansions in EMEA and APAC that help drive the growth there. but I wouldn't put too much into the quarter-to-quarter variability into the geographies. Overall, Samik, we're -- the strength in demand that we are seeing both in hardware and in the software subscriptions that I've talked about that is across the board and across geographies.

Samik Chatterjee -- J.P Morgan -- Analyst

Thank you. Thanks for taking the questions. Certainly. Your next question comes from Alex Henderson from Needham.

Alex Henderson -- Needham & Company -- Analyst

Thank you very much. So I was hoping you could talk a little bit about the transition to hardware in the context of the launch of the integration of the Beacon technology in a platform last year in the spring, which doest tie in the Kubernetes-NGINX oriented products back to the BIG-IP and to what extent you may be seeing some refresh there in those systems because the admin -- IT administrator, the CIO is able to bring some control back into the DevOps process and use that integration between the BIG-IP to the NGINX product to put guardrails in front of the DevOps people. Is that part of what's going on here as well or is it just simply that last year, you couldn't do installs because things were so locked down, but the installed base you've gauged in your report needed upgrade, is it -- could you give us a little bit more clarity around that?

And then the other piece to that is with Kubernetes' adoption according to recent plug thorough and numbers -- the 2x what it was a year ago and 96% of that -- of companies saying they're going to go with multi-cloud, can you talk a bit about what kind of integration you're doing with Hashi and partnering -- how your partnership with HashiCorp is starting up? Thanks.

Kara Sprague -- Executive Vice President and General Manager, BIG-IP

Hi, Alex, it's Kara.

Alex Henderson -- Needham & Company -- Analyst

Okay

Kara Sprague -- Executive Vice President and General Manager, BIG-IP

I'll start on the -- good to talk to you. On the transition to hardware, I mean we talked through a number of factors that are driving the strength and the robust demand that we're seeing in hardware today. One of those factors I do believe is around the strength of the portfolio is coming together and customers are seeing F5's relevance in modern applications and strong relevance in security use cases. And certainly, that's playing into some of what we're seeing. But I have to -- I really do think if you go back to the script and what Francois has already addressed in the questions, the robust demand that we're seeing is really more of the latter -- that latter factor that you described. So that at least the answer to your first question.

On the second question in terms of what we're doing with Hashi. We have a partnership with Hashi. We have several integrations in the BIG-IP space around various elements including we make strong use of Terraform integrations to enable automation for our customers and to simplify their deployments into public clouds. And, in addition, we're also looking at how -- we have another integrations in place to tie more into some of their orchestration tools like Consul to automate deployment and provisioning of BIG-IP offerings.

Alex Henderson -- Needham & Company -- Analyst

Great. Thank you very much.

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

Thank you, Alex.

Operator

Your next question comes from Jeff Kvaal from Wolfe Research.

Jeff Kvaal -- Wolfe Research, LLC -- Analyst

Thank you very much. Frank, can we start with you with the question on the guidance, please. Could you help us parse what you're thinking at the high-end and the low-end and what the impact of the systems mix would be in there? Typically when companies widen the range, they often widen it on both ends, I mean wider on the lower end and then -- I'm just wondering what kind of expectations and variables are built into that range.

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Sure. Absolutely, Jeff. So we were looking at all the factors coming into setting guidance expectations. In a normal cycle, if there weren't any supply chain concerns, we would have said, $6 million taking into account a less visibility than we would -- that we gave the additional room of the $10 million on the low end and so, that's a result of the range. In a perfect world, it would still be about $20 million range, but we just wanted to be cautious with our outlook.

Jeff Kvaal -- Wolfe Research, LLC -- Analyst

Are you more concerned that you might not get what would have been at the midpoint the $6 million versus $40 million number or are you more concerned that the mix might shift more heavily to systems than you thought?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

No, I think when we take a look out at the mix that we expect in the way that we talked about being at or about that 35% for software for the year. We're very comfortable with that outlook on the software side. The services we've been -- gave exact numbers for that and what remain is the system side. And so when we take a look at that $10 million of risk, we see that $10 million of risk really on the supply side, certainly not on the demand side. As we've talked about on multiple factors, the demand is quite strong.

Jeff Kvaal -- Wolfe Research, LLC -- Analyst

And then I guess lastly, I think we would all look forward to a little bit more of that smoother trajectory in the software side of business? I think you had suggested...

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Yes.

Jeff Kvaal -- Wolfe Research, LLC -- Analyst

That this March quarter was the last -- is really, really tough comp period. How close are we to having a more volatile or a less volatile software number from quarter to quarter?

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Yes. I -- again, I can't say it was 100% clarity, Jeff. But I think two things -- two factors that I say in the back half of Horizon 2. And so when we're taking a look at the fullness of FY '21 and FY '22, we knew this was a 96% comp quarter for us going in and that there was going to be some variability. Obviously, in the last quarter, we had 70% with Shape, 35% without. And so that range was right there where we thought it was going to be and we think it's going to be a bit smoother from here. There will continue to be variability where we'll start to see a lot more clarity as when we start to lap some of the multi-year subscription agreements and the bulk of that is going to happen in the back half of FY '22. And so we do have four more quarters of what I would say variability. I don't think the choppiness will be what you saw between Q1 and Q2 of this year though we will continue to have some variability in that.

But starting in that lapping period and then frankly, the denominator just gets so much bigger. So you don't have things that swing.

Jeff Kvaal -- Wolfe Research, LLC -- Analyst

Right.

Frank Pelzer -- Executive Vice President and Chief Financial Officer

We will start to see that as well. With the SaaS piece of the subscription continuing to grow as well, this is more -- when we take a look even beyond Horizon 2, that will become a lot more ratable in that factor and smooth things out. And so we do have some more choppiness ahead of us, but I think things really do start to smooth out when we're taking a look at the back half of 2020 and beyond.

Jeff Kvaal -- Wolfe Research, LLC -- Analyst

Thank you. Thank you, both very much.

Operator

Due to time constraints, we'll take our last question from Paul Silverstein from Cowen.

Paul Silverstein -- Cowen, Inc. -- Analyst

Awesome. That means I could ask five questions. So let me ask away. No, I do appreciate you filling me in. First off, Francois, I apologize because I know you've addressed this in other responses and if you had fully addressed, I do apologize, but I'm going to ask you. First off, so you've seen that it's probably not the bold statement to say you're not going to get credit from the investment community for the hardware strengths. So I just want to make sure that I heard you correctly. You're asserting that the software weakness relative to your original expectations is entirely a function of the number of customers unexpectedly opting for traditional hardware systems through their urgency in addressing the strong application growth in security needs. Is that what you're saying or is there something else in particular? Is there any underlying weakness in software mainly?

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

No. The -- we saw -- if you look back, there are two factors for if you're specifically, Paul, referring to the software growth rate at 20% versus the 35%, 40% for Horizon 2, there are two factors. One, of course, is that as Frank has just alluded to. It was a high comp relative to last year but, yes, the other primary factor is customers that pause the moderate end on migrations to software due to operational constraints. And that is reflected in a higher hardware number and a lower software growth number and that is very specific to BIG-IP.

It's not specific -- so in the other aspects of our software portfolio around NGINX and security, we have very strong growth. In fact, NGINX grew faster than overall product revenue again. But specifically with BIG-IP, the softness, if you will, in software there is directly correlated to customers choosing unexpectedly to us and it was a little bit of a surprise to us choosing to go to a hardware form factor instead of a software form factor in the number of cases.

I would also add, Paul, that when you step back and you look at that, the overall demand for F5 technology is very strong and as these customers continue to deploy BIG-IP, it increases our footprint, and when they do migrate to software, they won't migrate with us. We've already proven that for the last three years, they won't migrate on a BIG-IP software form factor. So for those customers that did that, it is a temporary delay in them moving to software. But that is absolutely there, a substitutive effect of customers pausing on software, going more on hardware because they were a little caught by surprise by the surge in application demand and given the COVID environment and the inability to rearchitect and work across teams to go to software, they chose to continue and deploy hardware form factors.

Paul Silverstein -- Cowen, Inc. -- Analyst

Understood. So that's the form factor choice news you're indicating, I suspect those customers choosing to remain on the hardware will eventually migrate to software. But it's not indicative of weakness in software per se, it's a form factor choice. Let me move on. I appreciate you mentioning that NGINX grew faster than overall growth. Any metrics you can cite with respect to Shape or anything above what you just said about NGINX in terms of quantifying what you're seeing from those two acquisitions. I recognize that Volterra is still at a very nascent stage, or at least it sounds like it is. But anything could add in terms of revenues or book or other metrics that you could offer providing more color as we progress in shaping NGINX?

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

No, I mean we shared, Paul, as you probably remember I gave some important metrics about the growth in AR for Shape since the acquisition and the growth in the number of customers. We have continued to see growth in the number of customers. I would say the growth, specifically the growth in AR with Shape this quarter wasn't as strong as we wanted and that's largely because we -- I was saying earlier that for customers for which we need to do a proof-of-concept in the current environment for the same reasons that in some ways are keeping customers on hardware on the BIG-IP affecting the proof-of-concept when people are not in the office and have to work across teams and collaborate and connect different systems together for a proof-of-concepts to happen. It's operationally, a little more complicated, it takes more time, and it takes more motivation for customers to go and do that.

And so when customers are in significant pain and they are under attack, it moves extremely quickly. And that's part of what overall when you look at the customers and the way in which it's blocking an increasingly high number of automated attacks, we're very, very happy and we think this thing about the difficulty of operationalizing proof-of-concept and getting through a sale cycle is really a temporary thing with the COVID that will go away down the road.

Paul Silverstein -- Cowen, Inc. -- Analyst

Finally, Francois. Just a clarification to -- in response to a previous question that you had. With respect to that microeconomic recovery and what we're seeing on a regional basis, I recognize it's still early, but given that the U.S. and U.K. in particular appear to be well ahead of Europe and perhaps other countries in terms of vaccination rates, any data points in terms of order book in the U.S. and U.K. or the metrics that would suggest what you should expect from other countries and regions as we eventually return of the 21st century?

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

I would say generally, Paul, no. I don't think when I look at the patterns of spend for us, this quarter, it was the -- I want to say, it's same last quarter. So you remember, Paul, I want to say, three years ago, we felt in Europe, in particular, we had a situation where the uncertainty of Brexit was weighing down on our numbers and we could feel the spending pattern there being really different. This quarter and the last quarter, I would say we don't feel that kind of difference. What we are feeling across the board is this. Everybody's gone digital, they're using their digital channels more and more, and it's causing the applications traffic to continue to grow steadily and that we're seeing the same in Latin America, Europe, North America, Asia. We don't see this difference related to COVID and where people are at and vaccination rates or coming back to the office. It's not really a first-order effect in our business at the moment.

Paul Silverstein -- Cowen, Inc. -- Analyst

I appreciate the responses. Thanks, Francois.

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

Thank you, Paul.

Operator

The queue is up. I'll now turn the call back over to the presenters.

Suzanne DuLong -- Vice President of Investor Relations

Thank you, all, for joining today and we appreciate it. As we said, the call is recorded and the replay will be available on our website. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 69 minutes

Call participants:

Suzanne DuLong -- Vice President of Investor Relations

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

Frank Pelzer -- Executive Vice President and Chief Financial Officer

Kara Sprague -- Executive Vice President and General Manager, BIG-IP

James Fish -- Piper Sandler Companies -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Sami Badri -- Credit Suisse Group AG -- Analyst

Tim Long -- Barclays plc -- Analyst

Samik Chatterjee -- J.P Morgan -- Analyst

Alex Henderson -- Needham & Company -- Analyst

Jeff Kvaal -- Wolfe Research, LLC -- Analyst

Paul Silverstein -- Cowen, Inc. -- Analyst

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