Francois Locoh-Donou
President, Chief Executive Officer and Director at F5
Thank you, Suzanne, and hello, everyone. Thank you for joining us today. As you all know, we entered our second quarter with some significant challenges that limited our ability to fulfill demand from our systems business. We are pleased to have delivered above the midpoint of our revenue guidance and at the upper end of our non-GAAP EPS guidance despite those challenges. Importantly, we continue to deliver strong results from our software business. With 40% year-over-year growth in the quarter, software represented the majority of our product revenue for the first time, systems revenue declined 27% as a result of supply chain constraints and our global services revenue was flat year-over-year.
Our second quarter reflected another in an ongoing trend where customers continue to rapidly grow and scale both the traditional and modern applications, while placing increased importance and focus on application security. This benefits F5 and translate to continued strong demand across our portfolio. While our view towards strong demand drivers remains clear, our visibility into resolution of hardware supply chain challenges is murky. Going into Q2, we discussed two primary supply chain challenges and I am happy to report that we successfully resolved the first, which was related to spend in electronic components and required us to design in and qualify an alternative source. The second challenge we discussed is related to global shortages of specialty semiconductor component. While we have made some incremental progress on this issue, we continue to expect supply constraints will limit our ability to fulfill systems demand through the end of this fiscal year.
Part of our efforts to fulfill system demand included shifting customers from our iSeries appliances to our next generation rSeries appliances, which launched in February. We are seeing solid traction in rSeries sales and we are ramping manufacturing. However, semiconductor constraints, primarily from a handful of suppliers, continue to limit our ability to ship iSeries and are now also impacting our ability to accelerate the ramp of rSeries. As a result, our systems revenue recovery has been delayed beyond the expectations we had last quarter. Frank will review our outlook in detail later in our prepared remarks, but as a result of the delayed systems revenue recovery, we now expect to deliver fiscal year 2022 revenue growth in a range of 1.5% to 4%. This compares to our prior expectations for 4.5% to 8% growth. Our underlying demand remains strong however, and we continue to expect to deliver software revenue growth near the top end of our 35% to 40% target for the year.
In light of the sustained strength of our demand and our view that the supply chain constraints are temporary, we are not making changes to our operating structure, and therefore, our margins will be impacted correspondingly near-term. We obviously feel a strong sense of frustration with this change and an equally strong sense of urgency towards resolution, so we can get back to reflecting the true health of the business in our reported results. We are taking every available path to resolve the issues as quickly as possible. Our suppliers expect additional capacity beginning in the last calendar quarter of 2022, which should translate into improvement during our second quarter of fiscal 2023. While the supply chain challenges are more severe than we estimated last quarter, they are temporary. In addition to seeing continued demand for hardware, we are seeing good traction across our software portfolio, including from security use cases and our ability to bring a broader solutions portfolio to customers.
I will speak to our business momentum and demand drivers before Frank reviews the quarter's results and our outlook in detail. Our customers are increasingly operating both traditional and modern architectures and looking to F5 for solutions that simplify and unite their strategies for both. As an example, during Q2, an American multinational beverage company and a long-time BIG-IP customer so like to NGINX to serve its cloud and Kubernetes-based workloads and modern use cases. The customer is using NGINX to automate app content delivery, including its loyalty program and delivery services, both of which have experienced substantial growth during the pandemic. The addition of NGINX technologies to the customers multiyear subscription resulted in a 2x expansion of the subscription upon renewal. Customers also are operating in multiple clouds and uncovering new challenges as a result.
F5's infrastructure agnostic approach to application security and delivery differentiates us from vendors who're siloed to a single environment. This means we are uniquely positioned to help customers with their multi-cloud of challenges. During Q2, we were selected by the Ministry of Health for nation in our APAC region, not being locked into a single cloud was an important consideration for this customer. They had intention of modernizing in a single-cloud short-term the plan to expand into additional cloud in the near future. The customer selected F5 over cloud-native offerings as a result of our solutions clear value-add and our cloud agnostic capabilities. We enable the customer to create a true multi-cloud architecture with both on-premises and cloud environment in a deal expanding our portfolio, including BIG-IP hardware and software with advanced WAF and NGINX including app protect and API management.
Finally, it's clear that hybrid architectures, including on-premises data centers and as a service offerings are here to stay. Applications and workloads also are increasingly containerized and mobile. This means complexity is here to stay tune and that managing applications across disparate environment will remain a challenge for customers. Meeting that challenge is likely to require a distributed cloud architecture and platform agnostic security and delivery technologies that provide consistent protection, visibility and performance for all application legacy, modern and mobile across environments. In Q2, we took a large step forward towards helping customers better manage multi-cloud complexities with the launch of our F5 distributed cloud services. With this platform, we are delivering security, multi-cloud networking and edge-based computing solutions on a unified software-as-a-service platform.
Our first solution for the platform F5 distributed cloud web application and API protection or WAP augments multiple security capabilities across F5 technology in a SaaS offering. This offering reflects the first major step in our integration of our Volterra platform and F5 software security stack. F5 distributed cloud services is globally available and we are seeing strong early enterprise and service provider. SoftBank announced one of the first notable win for F5 distributed cloud this quarter. The corporate information technology division of SoftBank needed to improve low resource utilization and other inefficiencies of its private virtualized infrastructure. But its security requirements mandated on-premises deployment with an option for future public cloud capabilities. It's not a way to bring the effectiveness of cloud-native micro services and containers to its private data center and turned to F5 distributed cloud services.
We are leveraging F5 distributed cloud branding to further integrate customers experience with F5 by simplifying our product meaning. You will see we have united and renamed our SaaS and managed services portfolio including Shape, Volterra and Silverline under our F5 distributed cloud services umbrella. So expect to hear us refer to those solutions accordingly going forward. In summary, despite our short-term supply chain challenges, there is a lot to look forward to from F5. We have multiple current and future software drivers that are well aligned with our customers' most pressing application needs, including BIG-IP's ability to serve and secure traditional apps, NGINX's ability to serve and secure modern apps and the exciting opportunity to grow and expand F5 distributed cloud services, we are well placed to enable our customers to manage and secure their growing and rapidly evolving application estates.
Now, I will turn the call to Frank to review our Q2 results and our second half outlook in detail. Frank?