Frank Pelzer
Executive Vice President and Chief Financial Officer at F5
Thank you, Francois, and good afternoon, everyone. I will review our Q4 and FY '23 results before I elaborate on the outlook Francois shared.
We delivered Q4 revenue of $707 million, reflecting 1% growth year-over-year, with a mix of 54% global services and 46% product revenue. Global services revenue of $382 million grew a strong 9% due to continued high maintenance renewals as well as the price increases we introduced last year. Product revenue totaled $325 million, down 7% year-on-year. Systems revenue of $134 million declined 25% year-over-year, reflecting a lower level of backlog related shipments than we had in prior quarters and demand that showed some signs of stabilization, albeit at lower levels than we've seen historically. In contrast, software revenue grew 11% over the year ago period to a new high of $191 million.
Subscription-based revenue grew 27% year-over-year to $166 million, another record high, representing 87% of Q4's total software revenue. Perpetual software license sales of $25 million represented 13% of Q4 software revenue. Revenue from recurring sources contributed 76% of Q4's revenue, another all-time high. Recurring revenue includes subscription-based revenue as well as the maintenance portion of our services revenue.
On a regional basis, revenue from Americas was down 6% year-over-year, representing 57% of total revenue; EMEA grew 16%, representing 26% of revenue; and APAC grew 4%, representing 17% of revenue. Looking at our major verticals, during Q4, enterprise customers represented 72% of product bookings; service providers represented 9%; and government customers represented 19%, including 7% from U.S. federal.
Our Q4 operating results were strong, reflecting operating discipline and a full-quarter benefit from the cost reductions announced in April. GAAP gross margin was 80.1%. Non-GAAP gross margin was 82.7%, an improvement of 125 basis points from Q4 of FY '22. GAAP operating expenses were $394 million. Non-GAAP operating expenses were $345 million. Q4 non-GAAP operating expenses, as a percent of revenue, was below 49%, resuming pre-2019 acquisition levels. Our GAAP operating margin was 24.3%. Our non-GAAP operating margin was 33.9%, representing an improvement of more than 600 basis points from Q4 of FY '22.
Our GAAP effective tax rate for the quarter was 13%. Our non-GAAP effective tax rate was 14%, below our initial expectations for the year as a result of IRS guidance issued during the quarter relating to foreign tax credits. Our GAAP net income for the quarter was $152 million or $2.55 per share. Our non-GAAP net income was $209 million or $3.50 per share, well above the top-end of our guidance range of $3.15 to $3.27 per share. This reflects the combined impact of our gross margin improvements and operating expense discipline as well as the Q4 tax benefit.
I will now turn to cash flow and the balance sheet, which also remain very strong. We generated $190 million in cash flow from operations in Q4, driven by our improved profitability. Capital expenditures for the quarter were $15 million. DSO for the quarter was 58 days. Cash and investments totaled approximately $808 million at quarter-end. Deferred revenue increased 5% year-over-year to $1.78 billion. We repurchased $60 million worth of shares in Q4. For the year, we used 58% of our approximately $600 million of free cash flow for share repurchases. I note that, in each of the past three years, we have met or exceeded our share repurchase commitments. Finally, we ended the quarter with approximately 6,500 employees.
I will now recap our FY '23 results. For the year, revenue grew 4% to $2.8 billion. Global services revenue grew 7% to $1.5 billion, representing 53% of total revenue for the year. Product revenue grew 1% to $1.3 billion, representing 47% of total revenue. For the second year in a row, software represented roughly 50% of product revenue. Software revenue was flat compared to last year at $664 million. This was down from our initial expectation of 15% to 20% growth as a result of customers delaying large transformational projects. As Francois noted, software renewals performed largely as planned. We delivered $671 million in systems revenue during the year, representing 3% growth.
I would now like to provide some additional information regarding software revenue. We've said we intended to provide additional software revenue details as the SaaS business scale. As we said last October, we had several SaaS and managed service transitions planned. We started these transitions in FY '23 and they will continue through FY '24 and FY '25, leading to some short-term revenue variability that is not necessarily indicative of potential future performance. We believe that providing visibility to our SaaS and managed service revenue and to their transitions that are underway, provides greater clarity on both our FY '24 revenue expectations and our expectation of returning to mid-single-digit revenue growth in FY '25.
Today, I will speak to three components of our FY '23 software revenue: the first, term subscriptions; the second, SaaS and managed services; and the third, perpetual licenses. We intend to continue to report the SaaS and managed service portion of our revenue on an annual basis going forward. In FY '23, revenue from term-based subscriptions, comprised of BIG-IP and NGINX subscriptions, contributed $353 million to software revenue, up 9% year-over-year. Under ASC 606, sales of term-based subscriptions are recognized largely upfront as software revenue. The remainder is deferred and recognized as service revenue over the term of the subscription. The majority of our term-based subscriptions are contracted for three years. Term subscriptions include both new, renewal and true forward or expansion revenue for both annual and multi-year subscriptions of deployable software.
New revenue includes new customers as well as new use cases, or offerings sold to existing customers. In FY '23 renewal and true forward or expansion revenue experienced healthy year-over-year growth, offsetting the weakness in new term subscriptions software projects. Renewals performing largely to plan in FY '23 is encouraging for several reasons. First, given the current levels of customer spending scrutiny, strong renewals are a signal that customers are getting the value they demand. Second, our renewals motion is still relatively new. And it's great to see confirmation that it is working as intended.
The second component of our software revenue, SaaS and managed services, contributed $203 million in revenue in FY '23, up 2% year-over-year. SaaS and managed service is comprised of our F5 Distributed Cloud SaaS offerings, revenue from managed services, including our legacy F5 Silverline offering, and our anti-bot and anti-fraud offerings, as well as revenue from legacy SaaS offerings. SaaS and managed services sales are recognized ratably as product revenue over the term of the subscription. At the end of FY '23, our SaaS and managed services ARR was $198 million, down approximately 2% year-over-year.
There were four primary contributors to this performance. First, we are seeing solid early momentum from our F5 Distributed Cloud Service SaaS offerings. Second, in FY '23, our most advanced anti-bot and anti-fraud managed service solutions underperformed relative to our plan as a result of customer spending caution and budget scrutiny. Third in FY '23, we began migrating customers from our legacy Silverline managed service offerings to our F5 Distributed Cloud SaaS offering. And fourth, we began executing the planned retirement of legacy SaaS offerings from companies we acquired. Both the Silverline customer migrations and the retirement of legacy SaaS offerings resulted in planned revenue churn.
The third component of our software revenue is perpetual licenses, which contributed $108 million in software revenue, down year-over-year after unusually strong FY '22. In FY '23, 71% of our revenue was recurring, up from 69% in FY '22. Several years ago, we began breaking out our security-related revenue annually. This year, our total security revenue, which includes standalone security, attached security and security-related to maintenance revenue, was approximately $1.1 billion or 40% of total revenue. Our standalone security product revenue grew 5% to approximately $475 million. We are seeing good traction with the lower-end anti-bot offering delivered through Distributed Cloud Services, as well as from security on NGINX. Our FY '23 security revenue growth was affected by customer spending caution, including stalled transformational projects and the underperformance of advanced anti-bot, anti-fraud solutions as I mentioned previously.
During the year, we overcame supply chain challenges and successfully returned our lead times to normal levels. As a result, our FY '23 product backlog returned to pre supply chain challenge levels and we closed the year with approximately $53 million in product backlog.
I will now turn to our FY '23 operating performance. GAAP gross margin in FY '23 was 78.9%. Non-GAAP gross margin was 81.5%, down 110 basis points from FY '22 as a result of higher supply chain costs in FY '23. Our GAAP operating margin for FY '23 was 16.8% and our non-GAAP operating margin was 30.2%, up 130 basis points from FY '22 as a result of our previously announced cost reductions. Our GAAP effective tax rate for the year was 18.7%. Our non-GAAP effective tax rate for the year was 18.3%. Our FY '23 annual tax rate was lower than expected, primarily due to IRS guidance issued during the fourth quarter related to foreign tax credits. GAAP net income for FY '23 was $395 million or $6.55 per share. Non-GAAP net income was $705 million or $11.70 per share, representing growth of 14.8% over FY '22.
Francois outlined our annual and longer-term outlook at the start of the call. I will recap it with some additional color. I will also provide our outlook for Q1. With the exception of revenue, my guidance comments reference non-GAAP metrics. In our FY '24 outlook, we've made the following assumptions. We expect customer spending caution will continue into FY '24, though we also expect customers will begin to reinvest at some point in the year. We expect our global services revenue will return to low-single-digit growth as we lap price increases. We have approximately $180 million revenue headwind in systems from FY '23's backlog fulfillment. We expect to continue to take share in the traditional ADC space with BIG-IP in both hardware and software form factors.
Within our software revenue, we expect continued strength from our term subscription renewals and continued growth from our F5 Distributed Cloud SaaS offerings. As I've discussed previously, we will have some planned revenue churn as we work through the SaaS and managed service transitions I discussed. We expect these transitions will be largely complete in FY '25. In FY '23, ending [Phonetic] ARR associated with the transitions is approximately $65 million, a little more than half of which is associated with offerings we intend to transition onto Distributed Cloud over the next two years. The net of these assumptions, combined with the current demand levels, leads us to expect FY '24 revenue in the range of flat to down low-single-digits from FY '23. Excluding the $180 million or 6% headwind from our FY '23 backlog reduction, our guidance range would reflect low- to mid-single-digit revenue growth in FY '24. Whether we achieve the bottom or top-end of this range largely depends on when customers resume more normal levels of spending. We expect some continued quarter-to-quarter variability as a result of upfront revenue recognition related to our term subscription offerings.
Regardless of our revenue performance, we remain committed to driving strong profitability. From an operating perspective, we expect gross margin will improve in fiscal year '24 to the range of 82% to 83%. This is primarily the result of supply chain related cost pressures working their way out of our model. We expect our continued operating expense discipline will result in FY '24 non-GAAP operating margin in the range of 33% to 34% for the year. On a percent of revenue basis, this would put our operating expenses roughly in line with 2018 levels, at roughly 49% of revenue. We expect our FY '24 effective tax rate will be 21% to 23%. In FY '24, we expect to deliver 5% to 7% non-GAAP earnings growth, which translates to at least 10% year-over-year growth on a tax neutral basis. Finally, we expect to use at least 50% of our annual free cash flow for share repurchases, consistent with our approach we have discussed previously. As of the end of FY 2003, we had $922 million remaining on our previously announced authorized share repurchase program.
We also want to take the opportunity to speak to our expectations beyond FY '24, as we believe it will help signal how we intend to run the business longer term. As Francois noted, we expect mid-single-digit revenue growth in FY '25. We expect to drive additional gross margin improvements and to deliver gross margins between 83% and 84%. We expect to grow our operating expenses slower than revenue, resulting in an operating margin of at least 35%. We will continue to prioritize profitability, adjusting our operating model, if needed, to enable us to deliver at least 10% compounded annual non-GAAP EPS growth. Finally, we intend to continue to use at least 50% of our annual free cash flow towards share repurchases.
I'll conclude with our expectations for Q1 of FY '24. We expect Q1 revenue in the range of $675 million to $695 million. We expect gross margins in the range of 82% to 83%. We estimate Q1 operating expenses of $332 million to $344 million. We are targeting Q1 non-GAAP EPS in the range of $2.97 to $3.09 per share. We expect Q1 share-based compensation expense of approximately $58 million to $60 million.
I will now turn the call back over to Francois. Francois?
