F5 Inc (FFIV) 2002 Q4 法說會逐字稿

Good afternoon.

My name is Heather and I will be your conference facilitator today.

At this time I would like to welcome everyone to the F5 Networks fourth quarter and fiscal year 2002 conference call.

All lines have been placed on mute to prevent background noise.

After the speaker's remarks, there will be a question-and-answer period.

If you would like to ask a question, press star and number one on the telephone keypad.

If you would like to withdraw your question, press the pound key.

This thank you, Mr. John Eldridge, you may begin your conference.

Thank you and welcome to our fourth quarter and fiscal year 2002 conference call.

The speakers are John McAdam, President and CEO, Steve Coburn, Senior VP of Finance and Chief Financial Officer, in addition, Dan Matt, our Vice President of Product Marketing and Product Management, Brett Helsel, Senior Vice President of Product Development and Chief Technology Officer, Steve Goldman, our Senior VP of Sales, and looks like Jullian Ames, is here as well, Jullian Ames, our Senior VP of Business Operations will also be present and available to answer your questions later.

Steve Coburn will begin today's call with a review of financial results for the fourth quarter and fiscal year 2002 and our current outlook for the first quarter of 2003.

Afterwards John McAdam will review the company's operations during the year and comment on F5's strategy, market position and recent product announcements and we will then open the call up for questions.

Before we begin, let me quickly review a few preliminary items.

First, if you don't have a copy of our press release, you can access the release on our website www.f5.com.

Second, an archived version of today's live webcast will be accessible from our website through November 12th, from 4:00 P.M today, 'til midnight Pacific time tomorrow.

You can also listen to a telephone replay at 800-642-1687 or 706-645-9291.

The conference I.D. for the replay is 5934633.

Finally, F5 management will host a meeting for analysts and investors at the Inter Continental Hotel in New York next Tuesday November 5th.

If you would like to attend the meeting, please call Carolyn Burkhart at 206-272-6590.

The meeting will also be webcast live at 10:30 A.M. eastern time.

Details are available on our website under the IR event calendar.

Except for historical information our presented today our discussion contains forward-looking statements which includes words such as believe, anticipate and expect.

These forward-looking statements involve risks and uncertainties and may cause the companies actual results to differ materially from those expressed or implied by these statements.

Factors that may effect F5's results are summerized in our quarterly release and described in detail in our SCC filings.

If you have follow-up questions after today's call, please direct them to me at 206-272-6571.

Now I'd like to turn call over to Steve Coburn.

Thank you, John.

For fiscal fourth quarter ended September 30, revenue up $27.1 million at the upper end of the range we set on our July 24th conference call.

This was essentially flat with revenue in the prior quarter and up slightly from revenue of $26.6 million in the fourth quarter of 2001.

Pro forma net income of $80,000 break-even on a per share basis was better than the two to three cent loss per share we projected at that time and a significant improvement over our pro forma loss of $1.3 million or five per share in the third quarter.

Including one-time charge of $500,000 related to the head count reduction on July 8th.

Net loss for the quarter was $423,000 or two cents per share compared to a net loss of 17 cents per share in the prior quarter and a net loss of $11.5 million or 46 cents per share in the fourth quarter of 2001.

For fiscal 2002, pro forma revenue was $108.5 million including a one time charge of $243,000 against product revenue.

Reported revenue was $108.3 million up slightly from revenue of $107.4 million a year ago.

On a pro forma basis we had a net loss of $5.1 million or 20 cents per share for the year compared to a net loss of $13.9 million or 62 per share for fiscal 2001.

Our reported net loss for fiscal 2002 was $8.6 million or 34 cents per share compared to a loss of $30.8 million or $1.36 per share a year ago.

First I'll comment on the results for the quarter and then discuss results for fiscal 2002.

Looking at the revenue breakout, total revenue for the fourth quarter reflected a mix of 70% systems revenue, 25% service revenue and 5% software sales.

Domestic sales accounted for 74% of revenue and international sales accounted for 26% reflecting continued softness in Asia Pacific and seasonal weakness in Europe.

Moving down the income statement, gross margin came in at 76% above our target range of 73-75% and up from 260 basis points from pro forma gross margin of 73.4% last quarter.

Product gross margin of 80% reflected lower component costs as well as manufacturing efficiencies and mixed change benefits.

Excluding the one-time charge related to our previously announced head count reduction, operating expenses were $20.9 million within our target range of $20.8 to $22 million.

Key balance sheet metrics for the fourth quarter include: accounts receivable DSO of 68 days within our target range of 65-70 days.

This is compare table able to the 67 days we reported in Q3.

Although we anticipated that inventories would increase during the quarter they remained relatively flat ending up a $349,000.

$1.5 million positive cash flow from operations marked the sixth consecutive quarter that the company has generated cash flow from operations.

On September 30, cash equivalents and investments totalled $83.3 million up from $78.9 million in Q3.

Now I will briefly review results from fiscal 2002.

As previously noted, revenue of $108.3 million for the year, was up a fraction from 2001.

On a pro forma basis the net loss for the year was $5.1 million or 20 cents per share compared to a pro forma loss of $13.9 million or 62 cents per share last year.

This represents an improvement of 42 cents per share including non-reoccurring items the net loss for fiscal year 2002 was $8.6 million or 34 cents per share compared with a net loss of $30.8 million or $1.36 per share in fiscal 2001.

Although revenue for the year was below our expectations, we improved our operating model and strengthen our financial position significantly as reflected in the following metrics.

Gross margins on a pro forma basis increased from 60.6% in fiscal 2001 to 72.2% in fiscal 2002 with an exit rate of 76.3%.

Pro forma expenses declined from $85.8 million in last year to $84.4 million in fiscal 2002.

Inventory levels net of reserves declined from $2.6 million at the end of fiscal 2001 to $349,000 at the of fiscal 2002.

DSOs have come down from 77 days a year ago to 68 days for the quarter just ended.

The company generated nearly $10 million in cash flow from operations during the past year increasing our cash equivalents and investments from $69.8 million at the end of fiscal 2001 to $80.3 million at the end of fiscal 2002.

All things considered, 2002 was a year of solid achievement and very challenging environment.

Looking out over the current quarter we don't anticipate any significant near term improvement in enterprise spending on technology.

Within the current spending environment we believe our recently introduced products will enable us to compete even more successfully for available business and continue to win market share from our competitors.

Nevertheless, we remain cautious about the prospects for significant revenue growth in the first quarter.

With that in mind, we believe we can achieve essentially flat revenue within a target range of $26 to $27.5 million, which we expect gross margin to remain at current levels within a range of 74-76%.

Operating expenses are currently targeted in the range of $20.6 million to $21.1 million.

Our Q1 earnings target range is break-even to minus two cents per share.

We believe DSOs will remain stable within a range of 65-70 days.

We continue to expect that inventories will increase from their present level to a normal range of $1 to $3 million.

Finally, we are forecasting $1.5 million plus or minus the million in positive cash flow from operations.

With that I will turn the call over to John McAdam who will comment further on the company's business strategy, market position and the significance of our recent product announcements.

Thanks, Steve and good afternoon, everyone.

I'll give you a quick overview of our performance during fiscal year 2002, provide some more detail on Q4 and then talk about our future opportunities including the new range of products that we announced last week.

In spite of the obvious economic challenges in fiscal year 2002 and the constraints in technology capital spending budgets, we still achieved some very significant successes for F5 during the year.

Revenues, that Steve said, were essentially flat at $108.3 million.

The successful introduction of the Big-IP 5,000 and the Big-IP 2,000 were key factors in raising our market share by approximately 11 percentage points.

We gained significant share from our competitors Cisco and Nortel and finished the year with just over 27% of the last four through the last seven fixed switch and appliance markets and approximately 79% of the FSL security encryption markets for last four through the last seven devices.

We also made huge progress on the balance sheet and financial metrics with products margins improving more than 10 margin points, operating expenses is essentially flat, positive cash flow from all four quarters last year and continued improvement in areas such as inventory levels and DSOs.

Perhaps the most important accomplishment in 2002 was the gap that we have created with the competition in terms of technology leadership and the traffic management solution space both in terms of new product introductions and partnerships.

Our iControl architecture is now well established with a wide range of solution partners like Microsoft, Oracle, BEA, Hewlett Packard, Siebel, webMethods, et cetera, et cetera, and many more key solution providers.

We estimate the iControl currently leverages approximately 15% of our business today and that number continues to grow.

As I mentioned earlier the applications switch products, the 5,000 and the 2,000 with embedded FSL security capability have been really well accepted in the customer base.

The introduction of Big-IP Link Controller and Big-IP Blade Controller, for the Blade Server [INAUDIBLE], have helped ensure F5 clear technology leadership in traffic management.

Also as we look ahead to 2003, I feel very positive about our ability to maintain this leadership especially when you look at the new products that we have, and we announced last week and I'll talk about those in a moment.

As far as Q4 was concerned, you have Steve's review of financial results.

It really was a very solid quarter.

We had some great sales wins in Q4 including major sales with companies like T-Mobile, Excenture, Sprint, Westjet Airlines in Canada, Quantis in Australia, Overture, Blue Cross Blue Shield, a number of U.S. federal projects, Telephonica, [INAUDIBLE] and the largest ISP in Japan as well as eBay and many others.

We also closed a growing number of license sales for our Blade Controller software to both existing and to new F5 customers.

Having said that, total revenues of the Blade Controller software remain relatively low while we wait for vendors such as Dell and IBM to begin shipping in volume.

We are planning to work with Dell on several beta customers this month and expect to do the same with IBM next quarter.

I remain very positive about the Blader Server opportunity but the ramp in revenue still depends on volume shipments from the server vendors.

Our services revenue during Q4 was very healthy and is starting to provide moderate growth as we move into new cycles with the large enterprised customer contracts.

We expect to see moderate continued growth during 2003.

From a geographic perspective, American operations had another solid quarter.

The Asia Pacific organization met our expectations but we still see tough economic conditions in Japan.

As Steve mentioned, our European operation produces negative growth in Q4 but that was due to typical seasonal weakness in that region and we expect to see that to diverse itself in Q1.

Let me now talk about our exciting new product announcement that we made last week.

We are still in the process rolling out these announcements worldwide and the reaction from the press, our customers, and partners has been excellent.

The main highlights of the announcement include the next generation of Big-IP.

We have [INAUDIBLE] revolutionary functionality, which introduces the concept of application traffic management into the internet data center.

Our announcement includes the universal inspection engine for traffic management, a new and wider range of product platforms and a new customer layer for [INAUDIBLE] and a new entry level Big-IP 1,000 platform and finally a dynamic security control architecture that can automatically respond to, act on and prevent application level security threats.

With application traffic management and universal inspection engine functionality, customers can apply all the traditional benefits of Internet Traffic Management which is high availability, security, scalability and performance across a wide range protocols and business applications.

Customers can now use the engine to switch and persist on any kind of business data within the packets.

Other competitor products tend to be constrained to applying rules on STTP and SSL header information only.

Customers can now optimize business application to to switch and persist on data like path numbers, employee numbers, cell phone I.D.s, et cetera.

This allows them to easily architect their web-based business application to provide easy scalability, availability, and performance enhancements at much lower cost than traditional back-ender servers investments.

This will open up new markets for us, like database scaling, web services security, mobile security and scaling, et cetera.

At the product level we introduced the 5100, the 2400 and 1,000 platforms.

Combined with the new application traffic management functionality we now have the most functional, the fastest and best priced performance in the industry.

As far as looking forward to prospects in 2003 is concerned, Steve already has given you guidance for Q1.

As far as the year is concerned, we intend to continue to management our business as we have done during 2002.

That is with tight business controls and a weekly focus.

We expect to continue to gain market share from our competition as we wait in the distance in terms of technology leadership.

Apart from improvements in the economic environment, we believe will see key growth drivers for our future business coming from area see newly announced products and the application traffic management opportunities, mobile internet expansion, security requirements, the Blade Server opportunity and web services and XML-based application growth.

I remain very positive about F5s competitor position and market opportunity and look forward to a new exciting 2003.

I will now hand over the call for Q&A.

May we have questions, please?

At this time, if you would like to ask a question, please press star and the number one on the telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from Sam Wilson.

Good morning.

Good afternoon, sorry, gentleman.

And everyone in the room, just a couple questions for you maybe starting with just tone of business.

Can you talk about, talked about business weak in September, how is business throughout the quarter?

What was your general sense and what's your sense exiting the quarter, John, and can you talk about how the relationship is going with Nokia and Dell not on the Blade Server products but the regular Big-IP product line and then, Steve, just a couple of business questions for you.

Can get the head count and can we get Cap Ex, please?

I'll answer the first question.

Last quarter the business profile.

Basically, July was pretty slow.

August was weaker, almost flat on July and September was pretty strong.

And as we look at October, and we still have got a couple of days to go, we do measure the business weekly, we believe that's very much on track.

In terms of Nokia and Dell, steady business from companies.

Dell OEM software business was down slightly; however, the overall business from Dell which is not only the software OEM but they also order our products as resaler was steady.

The Nokia business was up slightly from the previous quarter.

Yeah, Sam, with regarding head count we are 470 employees the end of the quarter, down 40 employees from the previous quarter, reflecting our head count reductions.

Cap Ex for quarter was $825,000.

Thank you, gentleman.

Thank you.

Your next question comes from Bob Lamb.

Thank you, hey, John.

Could you talk about trend on [INAUDIBLE] and specifically say new customer, you mentioned Excenture, for example.

How many boxes do they typically buy initially?

The trend in in deal size, Bob, continues to increase as we added to our portfolio, products like the Link Controller and other new additions.

We have more to offer both our installed base and our new customers and it's grown steadily.

I don't know the exact numbers off the top of my head.

But I think, what we are seeing is both for repeat business and new customer acquisition, their buying more products whether it's Big-IP and 3-DNS together to address local and wide area needs or specific to some of new offerings and what I'm really excited about with our new products, particularly the 1,000, where we've never had a product in our space before, is that we can really capture a lot of new entry level business that previously we didn't have access to.

I guess as a follow-up to maybe Steve.

If you rollout more slower end products like the 1,000, does it change the gross margin assumption going forward?

Is that a Steve Coburn question?

Yeah, I guess so.

We don't expect a major change in margin reflected in our guidance that we've provided.

There is some variations in margin but not significant.

I guess, great.

Thank you.

The other question I had was let's say for new initial customer, how many boxes, for example, Excenture you mentioned in your early comments, how many boxes do they typically buy from you guys?

I don't know if I know the exact number but the one that stayed consistent is that of redundant systems because our customers are still purchasing our technology to ensure high availability and reliability for their mission critical applications.

Literally 90-95% of systems that we sell are in redundant fashion.

I think the one thing we are seeing more of with our larger enterprise customers is a trend to standardizing on F5 as a traffic management solution so some of the largest household names in manufacturing and finance have really chosen us and now we're deploying things across all divisions globally.

That's the most note worthy trend as far as driving unit expansion.

This is a really tough question to answer, Bob.

For example last quarter we had one sale to a customer over $1 million, we did the previous quarter as well.

That started off as small sales.

In October we had a brand new customer with value under $600,000.

It just varies.

Probably the sweet spot is between $100 and $200,000.

Thank you.

Your next question comes from Tom Tadeshi.

Hello, guys.

Good quarter again.

You might remember me, I've been buying the stock for quite some time and have done very went well with it.

This question has nothing to do with the technology or how the business goes.

There's only one thing I was thinking of, I see a lot of CEOs and top brash and different companies are taking salary cuts for stock or stock options for the future.

And look on to the internet sites and found that the salaries for four of the top people at the company are approximately $2.98 million for the year which would approximately be $740,000 per quarter.

If you guys were willing to take cuts on that, would cutting the salaries of top management and getting stock instead, would that help the bottom line of the company?

I think if you do the sums it would help the bottom line, if you're looking at the past years, by the way, my personal salary involved introduction fee, in fact, I ended up paying to my previous employer plus relocation, so that was a onetime hit.

I don't like talking the personal stuff but that's the reality of it.

We are basically running the business efficiently.

The key thing for us is making sure that employees and their executives get valued as the stock goes up and therefor focus on shareholder value.

Next question?

Your next question comes from Jason Ender.

Hi, guys.

Can you hear me?

Yes.

Okay, great, I had a couple questions related to the sales and distribution arenas.

First on distribution, could you give us the mix between direct and indirect?

Yes, I'll take a stab at that in general terms and Steve can follow up with more exact numbers.

I think we said in past calls, we have 100% channel model outside North America.

We had that pure model since we launched business operations in Japan, Asia Pacific and Europe.

In North America where we started in the early days of the company with the direct model, we've steadily moved that more and more towards the channel model so we can get the breath and the reach of a larger company.

Last North America I think we did roughly 85% or so of our business through the channel and the portion that we haven't has been with our top ten or so customers who do have volume purchase agreements.

Again, all household names that we do direct business with.

But we are very much a channel model business from a distribution standpoint and in fact, we now pretty much have two tier distribution in all of our major markets.

About three quarters ago we started working with Ingram Micro in North America and that allowed us to continue that expansion so we are making great strides there.

Do you have any 10% customers in the quarter?

No, we did not.

And the last question, in terms of verticals, could you talk about the key verticals that you guys have been in and where the strength and weaknesses are right now, imparticular the government education sector, you guys are gaining traction there, which historically haven't been a big area of deployment for this type of product, but clearly that's where a lot of dollars are spent now.

I can answer the vertical question.

We are continuing to see great strengths in the financial services area.

That vertical has embraced our products both from availability and securities standpoint.

And also, now that many of the financial services are leading the charge in deploying web services as a big strategic initiative to drive their cost of doing business down, they really like what we've done in our products to be a good citizen in the web services environment as well and help them deliver those applications in a secure highly available and predictable fashion.

That continues to be a large force.

Probably 15% of overall for us in the last quarter.

Typically we are still deployed very horizontally across different vertical markets.

A wide deployment of our products both federal wireless, standard enterprise, many different places.

This is Steve Goldman again.

Just to follow up on the government part of your question, we, of course, share the same fiscal year end year at a very strong finish.

In fact, one of our largest successes with Dell has been as part of the Navy, Marine internet project and they're one of our larger customers now overall with somewhere around 100 Big-IP systems deployed and that's part of a long-term roll-out.

In fact, we've done well with the defense and intelligence agencies and I think has ever since September 11th as more and more money has shifted to that kind of focus and concerns about security, that's helped drive demand for our business and it's probably one of the areas where we'll continue to see nice growth in 2003.

Okay, thanks, very much.

Your next question comes from Mark Foo.

Good afternoon.

Can you talk about any attempts to front-load the quarters and improve linearity?

And separately, you mentioned you gained share on the quarter, any thought on the pricing environment, please?

With regard to linearity, we've been consistent with over the last six to eight quarters with 50-55% of our business coming in the final month of the quarter.

We actually expect that to continue.

That's likely just the nature of the beast.

On pricing, we've remained consistent there which is a good sign parly in a challenging environment.

Price pressure is one of the first things you see.

That says we have priced our products and services for good customer value.

Both are discount structure to our two tiers of distribution as well as what our end customers typically pay for products has remained very consistent over the last several quarters.

Any thoughts on who you might be gaining share from, would it be still Cisco Systems?

If you look at last year, just finished in quarter four, we grabbed significant shares, as I mentioned my talk.

Yes, Cisco and Nortel definitely the two key ones.

Thank you.

Your next question comes from Matt Berakasis

On the services line, if you could break it down between maintenance and actually service, and I could be wrong but I thought in the past you were talking about the services would start coming down as the channel was picking that up, so just talk a little about that.

Yeah.

With regard to service revenue, most of our revenue does come from maintenance revenue so that's the majority of our revenue that we've seen there.

I think we have a couple of things going on in the service revenue.

We do, as we sell through channel, see some reduction to attach rates when our channel partners are providing service.

On the other hand, that's been more than offset by higher ongoing renewal maintenance from enterprise customers.

As a matter of fact, we've seen two consecutive quarters where our deferred revenue balance and our balance sheet has increased.

We are up about $1.4 million this quarter so we are -- I think we've turned the corner with regard to our service revenue we are now starting to see an increase as measured by our deferred revenue balance.

And just to [INAUDIBLE] with regards to channels, we have many suites of services some of them where they deliver themselves [INAUDIBLE] revenue, many where we deliver directly, revenues to themselves.

What we've a seen is growth of the direct service in North America and in the course of the year we've opened service centers in AsiaPac and Europe and that's started to see growth in revenue for us as well.

Thank you.

Your next question from Vic Kular.

Hi, guys, this is Vic Kular from Wachovia Securities, I have three quick questions.

First one was, you mentioned iControl is leveraging approximately 15% of business, is this number trending higher in a quarterly basis?

Second question, was you mentioned Japan continued to be a little tough, but you also mentioned on of the largest ISPs in Japan as a customer, is that customer a new customer and can you talk a little about that?

And the final question I had was Blade Servers, any new customer wins besides COMPAQ, Proland, are you expecting to ship it on any other platform?

Okay.

Right.

Take them one at a time. iControl, the percentage I said was 15% and that definitely is up from the previous quarter.

I think we talked about 10% roughly was the number so definitely going up.

Some caution on that, some really difficult thing to judge, because there is some subjectivity in judging it.

We thing that is a pretty conserve number.

As we look, for example, we've now got Big-IPs and a lot of the Microsoft enterprise showrooms just by definition when customers come in to look at the dot net applications, they actually see them running with our product so that type of pull-through is really quite difficult to measure.

But definitely it's trending up and I think it will continue to trend up, especially with the latest revision of software and the application traffic management area.

So, I think that keeps going.

In terms of Japan, it's tough but I feel very, very positive about our market division and our medium to longer term opportunities in Japan.

Steve Goldman and I were over in Japan last week and we attended our partner conference on Friday.

We had 150 partners there and they included, and some of the partners spoke and talked about the partnership with F5, and talking about names like NTT and NT Data, who we signed up just recently, IBM Global Services, who we did between $300,000 and $400,000 in Japan last quarter and the ISP, in fact, just to finish the question, the ISP was a small customer and is becoming a much bigger customer but had been a customer before.

They actually, in fact, hosta Yahoo! in Japan.

In terms of Blade Controller software, we had a number of-wins.

Some were brand new customers at F5 that I just bought [INAUDIBLE], in fact, one of the new customers bought Blade Controller and Big-IP products.

That was mainly with the HP COMPAQ servers.

Dell has only beta testing.

Fujitsu-Siemen just started shipping so we're hoping to get orders on the Fujitsu-Siemen platform this quarter.

Hoping to get orders from Dell after the beta tests are finished and IBM we expect next quarter.

Great.

Thank you.

Your next question comes from Chris Vesting.

This is Chris Vessing, question, on the sales and marketing expenses, what type of leverage do you expect?

At $13 million, 48% of sales, I don't assume you're going to be ramping that too heavily.

Can you talk about what type of revenue level that can support before you take a next step up?

We can concur with your observation that there's a lot of operating leverage in our sales and marketing spend.

I think some areas where we expect leverage looking forward is, you know, we continue to gain efficiencies with our channel model in the U.S.

I think there is continued opportunities there as well.

We're pretty much migrated to 100% channel overseas so we are looking at a lot of our leverage going forward coming from the North American theater.

Just to expand on that, the way that shows itself is in terms of revenue per head count.

In the markets like Japan where we've had the channel model the longest and our distribution model is most mature and our partners are the most prestigious and average quarterly quota per sales person is really quite high.

In North America where our sales force is most mature from the staffing perspective but we've still been increasing the channel models steadily over the last several quarters, that's where the biggest leverage is going to comes from and that'll show itself in both increasing quotas and obviously increasing results per sales person in North America and I think over this next year, that's where we'll see the real growth and, of course it will bring the sales spend down relative to revenue.

Okay.

And then, looking at your R&D came down a little bit in the quarter, is that a result of the introduction of the new products coming out of there or is it just a cutback in discretionary spending.

You know what, it is primarily associated with the new timing introductions.

In the previous quarter we had a lot of new prototyping expenses.

As we were bringing that technology to market, most of those expenses were in the previous quarter and that was really accounted for most of the reduction in product development spend quarter-over-quarter.

So you expect that to remain relatively flat going forward?

We will see variation depending on where we are in the life cycle in development for future products.

Things like prototype spending will go up.

We have said we are committed to maintaining our leadership position in technology and where appropriate we will invest accordingly.

And last, if you could talk about the competition, who you are seeing and what percentage of the time you are seeing those competitors and what type of win rate you are experiencing there, and then, Steve can give me a tax rate.

This is Steve Goldman.

I'll start that one.

Cisco is still the incumbent player that we see the most particularly as our audience, you know, the focus on the enterprise and our win rate continues to be quite high.

As we continue to improve our technological lead, that has gotten better and better.

In fact, I think again with these new announcements with the new platforms and the new software enhancements for the first time we'll really be able to claim the high ground in performance and functionality.

On the lower end of our market, where I think the Big-IP 1,000 will fit is where we sometimes see foundry.

And my sense is there is business we haven't seen before.

That product will now have a nice opportunity for us.

This is Dan Matt.

The other thing to add to what Steve just said, that is with the new capabilities of application traffic management really makes us unique in terms of being able to pair our technology up with specific types of applications and opens up a whole different area for our technology to be deployed within the enterprise.

Typically our type of technology layer four through seven switching would be associated with a web server here and with application traffic management, we are able to deploy our products in many other tiers of people's architectures.

From a competitive standpoint, that really puts us, as Steve said, puts us on the high ground and stand alone for solving problems for people.

And a tax rate?

What was the question?

The tax rate for next year?

You know what, we will reinstate -- we have not been recording a tax provision, we will reinstate that at the et we have demonstrated sustained profitability.

We expect that to happen late next year.

For most of the year, we will not be applying a tax provision.

Okay, thanks.

Your next question comes from Troy Jensen.

Gentleman, first of all, congratulations on the bottom line results.

A couple quick questions, can you expand on the Link Controller product?

We've heard a lot of hype from the private companies in that space and we are seeing more corporations multi-homing.

Sure, this is Dan Matt speaking.

The Link Controllers are an interesting addition to our product line.

One of the things we've seen in the market place over time especially in these tougher challenging climate is that instead of people going and addressing high availability from the standpoint of deploying multiple data centers around the world, typically they are doing one data center with more connectivity coming into that single data center.

The traditional way of making that connectivity happen and guaranteeing availability is usually through routing technologies.

What we heard time and time again from our customers is they wanted a simple more reliable way where they didn't need the cooperation of their service provider to bond or combine multiple links together to provide that availability and combine band width.

So from Link Controller, we are addressing it from sort of a packet switching perspective where some of the people that are attacking that problem, namely the private companies from a BDT or routing tuning angle, you could liken the difference between our approach and their approach.

Ours would be switching a train on a car-by-car basis and making the right decision, where as they're simply throwing the switch one time and letting the whole train go down the path and then trying to make another decision later.

It's a much much finer grain in results and better performance, better availability for our customers.

So, is F5 on of the only companies that actually inspects the packet before making the routing decision?

That's correct.

And one last question on the Nokia relationship, have they expressed what they plan to do with their last option to purchase stock?

No, they haven't.

And like the other previous, I doubt if they will express that to us until the actual time.

I may be wrong but I suspect we won't hear anything.

Okay, congrats again, guys.

Your next question from Brent Bracelan.

John, you mentioned [INAUDIBLE] internet as a potential growth driver going forward and also mentioned T- Mobile, Sprint, Motophone as customers in the quarter.

Trying to pinpoint the wireless vertical opportunity there, how much of that is dependent on Nokia how much of that is actually dependent on the F5 sales team and their own relationships.

Talk about the mix between these would channels maybe this quarter and kind of the reliance going forward that is my first question.

Next question is a follow-up on Nokia.

Where are you at with development on the integrating of your software within their wireless infrastructure group.

Okey-dokey.

Dan, you answer the first question?

Sure, happy to.

In terms of reliance on Nokia's channel and sort of a traditional wireless channel in terms of how our technology gets integrated there.

Certainly there are some very specific applications like supporting MMS, multimedia messaging and short message services, SMF, around the world, those types of opportunities are largely driven by sort of the typical Nokia channel.

The other channel, other types of deployments in the wireless world really revolve around protocols like [INAUDIBLE] protocol.

As people start delivering more and more of their wireless 3G networks where they do IP traffic to their handset and embracing [INAUDIBLE] protocol for their voiceover IP traffic, we are seeing wins from the F5 channel and we can point toward people like Sprint, for example.

Okay.

It's interesting.

The mobile is approaching 10% of our business, certainly above 5% and approaching 10 doing a lot of business with companies like Ericsson and MMS, NTT, Deutsche Telecom, Sprint, Qwest, China Mobile.

It's been really interesting, [INAUDIBLE] in terms of getting more exact numbers but we think that is going to increase over the next few quarters that is why I put it down as a growth factor.

And then on the integration of the software within Nokia's infrastructure division?

Yeah, Brent, this is Brett, as you know last spring we -- Nokia did some prototypes for their mobile content delivery networks that met with smashing success and they've got follow-on product releases rolling out now that Big-IP, our traffic manager is a big part of.

In August I went to Finland with some of the key folks here and defined a number of cross development objectives with the wireless teams as well as some of the other teams in Helsinki, that's one of the more exciting things we are doing in applying our technology toward the delivery of content over wireless networks and Nokia is clearly one of the leaders in that space.

Sounds like it's dependent on the success [INAUDIBLE] wireless infrastructure side?

I think that's absolutely correct.

It's interesting because they identified a number of applications early on that would -- where content is delivered over the cell phones or wireless network and what's interesting is a whole plethora of new applications have arisen based on the early work they've done, so a lot of opportunity for us to collaborate on this and Nokia is doing extremely well on 3G wins and that's opening up a lot of markets for us.

And last question and let you guys hop here, withe new software release especially with the new capability with application management, are you in any discussions on the OEM licensing front, you know, beyond the Dell-Nokia relationships where you can leverage that software technology into new OEMs.

Not really.

We always look around for that opportunity but I don't think -- it's not quarter, our strategy.

We are interested in iControl being effectively, we have the core solution in Big-IP and i Control is built into solution providers and MS application management, the user products build whole infrastructure solutions whether it's security or mobile or whatever, we are much more interested that way in pulling whole product range.

John, this is Brett again.

One of the other trends we are seeing is the whole adoption of web services is that people as they are building applications whether it's an enterprise or software vendor building their application, looking basically to subscribe to traffic management as a web service so they are very, very easy at this point in time because of our adoption of embracing web services for somebody to build traffic management right it into their applications.

We are seeing software vendors such as webMethods when they go through and make a decision, they basically make versus buy, of how to approach the traffic management problem and seeing more and more people taking the route of subscribing to traffic management via web services because it's easier to do now than a year ago or even nine months ago.

Interesting.

Thanks.

Your next question comes from Preston Rason.

A quick question maybe it will come out in the [INAUDIBLE].

I was wondering, you guys extending credit or financing with any of your bar relationships, number one, and number two, I was wonder with next year Blade Server going forward seems to me would your quarters be less linear with the Blade Server market you guys built up or more pricing power there?

Thanks.

We currently don't provide any financing, end user financing through channel networks.

It's typical to say with the impact of Blade, revenue is going to be on linearity.

It will likely probably attract the linearity of the sales of that solution.

It's early days and I guess we don't really know exactly what that revenue stream is going to look like in terms of linearity.

It really is, it's as we say [INAUDIBLE] with Dell, probably the next quarter with IBM and Fujitsu-Siemen effectively just starting to ship, the interesting thing is, things are progressing like Ingram Micro are shipping CD of the Blade Controller software, shipping out their Blade [INAUDIBLE] solutions, so that could have an affect on linearity.

I would not like to a guess as to put a number behind it but that type of ordering could make a difference.

Thanks.

Your next question comes from William Becklane.

Hi.

Do you think that traffic management acceleration market is growing faster than the aggregate IG spending and if it, why not?

This is serving a whole new need and fundamentally enterprise networking is pretty saturated.

Why shouldn't you be able to show higher growth than the rest of the market you're competing in?

I don't know if I know the answer to that.

The actual, unfortunately, the traffic management overall market, you cannot deny this, it has been shrinking over the last couple years definitely related to enterprise spending.

We've been getting market share on flat revenue.

SSL is definitely growing, no question about that.

We've gone from being negligible a year and a half ago, to shipping with more than 60% of our products.

In terms of specific markets, Dan?

We're certainly seeing again when we look at the way people are deploying their enterprise applications over IP networks, sending them through web portals, the traffic is tending to be secured by SSL.

We are at the tip of that trend yet.

As we are out there talking to enterprises, we'll we put their efforts back into two categories.

One where it's a formal strategic undertaking and another where it's a more organic effort within the enterprise and certainly the people in the organic camp are more popular at this point.

So obviously I concur with John in terms of it's difficult to tell but we think that will -- or people will use that technology more and more moving forward.

If you look at the broader numbers, companies like SunMicro Systems and EMC, the Oracles of this world, the large Bellwethers of capital spending have seen revenue decline.

We've seen revenue flat to very slightly up.

By definition I think the spending and networking and traffic management has been more but clearly we are affected like everybody else.

Capital budgets are very tight.

Can I follow on with a question, to the extent this is identified as a growth area and the fact you have stayed flat while the rest of the market goes down probably speaks to that, do you expect this will create an opportunity for more competition in box business?

It's possible.

The thing I'mexcited about and not a lot of questions this afternoon, interestingly enough, is the whole application management space, I don't know if my message got out loud and clear but basically what we are seeing here is instead of just moving data around in a more efficient and available manner, we're talking about looking at the application and I think that's got real opportunities for growth.

Time will tell in that.

We are certainly going to be going out to the industry analysts in the last customers and explaining they can now do, and how much money they can save with application management, but I wouldn't think a number on it yet.

Okay.

Thanks a lot.

At this time, there are no further questions.

Okay.

With no further questions, thanks for listening to the call and talk to you next quarter.

Thank you.

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