F5 Inc (FFIV) 2003 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the F5 Networks Second Quarter Financial Results Conference Call.

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

After the speaker's remarks there will be a Q&A period.

If you would like to ask a question during this time, press “star” and then the number “one” on your telephone keypad.

If you would like to withdraw your question, you may press the keypad.

Mr. Eldridge, you may begin the conference.

Thank you, Gail.

Welcome all of you to our Second Quarter 2003 Conference Call.

The speakers on today’s call are John McAdam, President and CEO, and Steven Coburn, Senior Vice President of Finance and Chief Financial Officer.

Jeff Pancottine, Senior Vice President of Marketing and Business Development, Brett Helsel, Senior Vice President of Product Development and Chief Technology Officer, Steve Goldman, Senior Vice President of Sales, Jillian Ames, Senior Vice President of Business Operations are also present and will be available to answer questions during the Q&A period.

Steve Coburn will begin today's call to review the financial results for the second quarter and our current outlook of the third quarter of 2003.

Next, John McAdam will review the company's operations during Q2 and discuss F5's current business strategy, market position, recent customer wins and acceptance of new products.

We will then open the call up for questions.

Before we begin let me quickly cover a few preliminary items.

First, if you don't have a qop by of the press release, you can access the release on the website at “www .f5.com.” Second, an archived version of today’s live broadcast will be accessible from our website through May 7th.

From 4:00p.m. today until midnight Pacific time tomorrow, you can also listen to a telephone replay at 1-800-642-1687, or if you're calling from outside the United States, 706-645-9291.

The conference IDfor the replay is 9269251.

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

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

Factors that may affect F5's results are summarized in quarterly release and described in detail in the SEC filings.

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

Now I would like to turn the call over to Steve Coburn.

Thank you, John.

Revenue and earnings for the second fiscal quarter ended March 31, 2003, were squarely inside our target ranges.

Revenue of $28 million was at the upper end of the $27-28.5 million guidance we provided in our January 22nd conference call.

Net income of $815,000 or $0.03 per share was within our guidance of $0.02 to $0.04 per share.

During the quarter we saw strengthening in all of our International markets, which contributed more than 37% of total revenue.

North America, which represented slightly less than 63% of revenue, reflected continued softness in IT spending.

Strong demand for our new products, which drove application switch sales to 67% of total systems sales, also helped boost revenue in the second quarter.

For the quarter systems sales accounted for 68% of total revenue, with service and software accounting for27% and 5%, respectively.

Product revenue, including systems and software,increased 4% from the prior quarter.

In the second quarter, we had one 10% customer, Ingram Micro (ph), who accounted for roughly 13% of revenue.

Farther down the income statement, gross margin for the second quarter was 76.8%, at the upper end of our 75-77% target range.

This is comparable to 77% we reported last quarter.

Total operating expenses of $20.9 million were within our 20.7-21 million guided range.

On the balance sheet, accounts receivable DSO (ph) ended the period at 66 days, well within our guided range of 65-70 days.

Inventories increased modestly to just under $500,000.

This remains below the $1 million plus level that may be necessary to sustain future growth.

Cash flow of 2.9 million represents the eighth consecutive quarter of positive cash flow from operations and helped boost cash and investments to 90.1 million at quarter end.

Investments include approximately 27 million in interest bearing securities, with maturities that exceed twelve months in duration.

Now a look at the current quarter, as in the prior quarter revenue visibility remains limited, particularly in North America.

Nevertheless, we believe we will continue to see strong demand for our new products and further strengthening in international markets.

Within this context, our outlook reflects modest revenue growth potential while maintaining earnings at current levels.

For the third quarter, we have set a target revenue range of 27.5-29 million.

We expect gross margins to remain at current levels, within a range of 75-77%.

Operating expenses are currently targeted in a range of 20.9-21.3 million.

This anticipates a small increase in spending in the current quarter from increased marketing and tradeshow activity.

Our Q3 earnings target is a profit in the range of $0.02-$0.04 per share.

We expect DSOs to remain in the range of 65-70 days.

As previously notes, the inventory levels are likely to increase over time to a target range of 1-2 million.

That said, we believe we will continue to generate positive cash flow from operations in a target range of 2-3 million.

With that, I will turn the call over to John McAdam, who will discuss key operational issues that contributed to our Q2 results and provide details about our outlook for Q3.

Thanks Steve, and good afternoon everyone.

As Steve indicated in his summary of the quarter, financial results in Q2 were very solid across the board, and we now have two good quarters behind us as we move into the second fiscal half of 2003.

Our forecast for this current quarter is exactly the same as I stated on last quarter’s call.

Namely, first of all, revenue growth while maintaining profitability, continue with market share growth, and thirdly, maintain technology leadership.

Let's look at some of the highlights of the quarter.

A significant highlight was the acceptance of a new application switch product which question started shipping in December.

Sales of the 5100, 2400 and 1000 were all very strong , with the application switch range of products contributing, as Steve mentioned 67% of systems revenue.

Also the reaction to the new application traffic management functionality, which we call the universal inspection engine, has been terrific.

The universal inspection engine functionality was very been key to the sales wins which I will talk about in a moment or two.

In addition to the new sales wins, we saw a lot of our customers upgrading their software so they could use this functionality.

The capability of the universal inspection engine to direct , persist, filter or switch on any piece of application data in the header or the payload of packet, gives our customers the power to produce pretty sophisticated security and application enhancements, tailored specifically for their application needs.

We also saw virtually all signs of material business coming from the blade server market.

As most of you know, the blade server opportunity has been slow to materialize, mostly because of delays in shipments of new systems from the server vendors, but we are now finally starting to see these new server architechture shipments increase in volume.

We had some great new wins with our blade controller software, a number of which went to brand new customers who had never purchased from F5 before.

In fact, 60% of our new BIG-IP blade controller licenses were to brand new F5 customers.

Clearly, that situation gives the opportunity us to sell core traffic management products to those customers in addition to the blade software.

As I mentioned earlier, we saw great acceptance for the new product portfolio factor.

These products allow us to make good progress and sales to large, Blue Chip enterprise customers.

Examples being AOL- Time Warner, the State of New York, Cybersecurity, Verizon Wireless, Goodyear, Hallmark, Starbucks, Parker (ph), United on-line, Travelocity, Teleflora, Microchina (ph), Sony Finan (ph) the Nordic Bank, Belgicom, Segetel (ph) and many others.

Most of the above were brand new wins and of course, we continue to see strong business from existing customers like Citibank, Accenture, Sprint T-Mobile, Washington Mutual to name a few.

It's also interesting to note that many of the wins appearing above actually replaced existing competitor's equipment.

You may already have seen the joint announcement we made this morning with Nokia.

Under this agreement, all of the divisions of Nokia, including Nokia Internet Communication, Nokia Networks and Nokia Mobile Products now have access to F5’s full suite of application traffic management products for resale to Nokia customers.

In addition, Nokia will integrate F5 products into solutions for wireless carriers, allowing Nokia to better differentiate product offerings, minimize cost and provide new solutions.

As I have mentioned in previous calls, our focus over the last few months has been to build a more corporate relationship with Nokia in general.

And I believe the opportunity is going forward especially in the wireless and mobile space to be exciting.

The new agreement becomes effective in the third quarter of calendar 2003, which is our fiscal fourth quarter.

Our relationship with Dell also continues to produce solid business.

We saw modest sequential growth in total sales through the Dell channel with a sequential increase in reseller sales compensating for a slight drop in OEM sales.

The partnership with Dell continues to make progress.

For obvious reasons, given the knowledge base within Dell of our BIG-IP product range, we see Dell’s blade server market to a big medium to long-term opportunity.

In addition, we are pretty far advanced in our plans to supply our BIG-IP software on the standard Dell server, the 2650.

We are working with Dell to have our software available as a customer factory install option so that it can be ordered through the Dell sales quarter and shipped direct from the factory on a standard Dell 2650 server.

This should be available this quarter and effectively adds a ISV relationship to the partnership in addition to the existing OEM and reseller relationships.

From a technology viewpoint, I feel good about the product road map.

Over the next 12 months we contend to add continued functionality and performance to maintain our leadership in application traffic management and SSL security capabilities.

We will also add more and more security capability in the product line, similar to the management we had earlier this month with our new security enhancements to our BIG-IP software.

BIG-IP is uniquely positioned in the enterprise network to add more and more key security features and provide true dynamic and enforcement and intelligent protection right up to the application level for mission critical applications.

We have already started a process of including security features on the BIG-IP solution.

This month we announced industry leading denial of service protection, a real-time application security feature and you should expect to see an addition of new features accelerate over the next twelve months.

Hopefully, you also saw a new product announcement for iControl services manager product that we started shipping at the end of the quarter.

This is a comprehensive network management solution, it's all software based and it improves the network infrastructure effectiveness by centralized administration.

This functionality will allow our customers to manage the network and applications from a central point, reduce costs, increase security and improve the overall performance of the network and applications.

The interest in this product from our customer base, especially the large enterprise customers, has been very strong with a large list of beta customers testing the product before release.

The main advantage of this product as it leverages the company’s iControl architecture, adds value to existing product and gets customers a powerful tool to administer, control complex networks and applications.

Let me just comment now on the revenue breakdown for last quarter and then finish with some comments on our outlook.

Steve talked about some of this, but generally international revenues were up, albeit moderately, across the board, including sequential increases in Japan, Asia-Pacific and Europe.

We also saw sequential increases from our service business, both in quarterly revenues and in the size of the fair revenue balance.

This is clearly a result of a continued penetration of project win and to major occurrence to acquire premier mission support capability.

North American revenues were down the quarter-over-quarter due to continuing tough IT spending environment.

Having said that, decline in North American was more than compensated by growth in international services and the blade server sales.

As far as the outlook is concerned, Steve has given you the range for both revenue and EPS.

Overall, we see our business in North America essentially flat quarter-to-quarter, with upside growth potential in services, blade control software and international sales regions.

I really believe that F5's position in the network and grueling (ph) real estate with corporate enterprises is a key comparative advantage in moving forward.

This gives us a unique opportunity to take advantage of growing customer requirements for application traffic management, economic security enforcement functionality and the need to efficiently manage and reduce the cost of a grueling complexity and goal of Internet datea centers.

Overall, I'm optimistic about the future potential for the company.

Now I'll hand the call over for questions and answers.

At this time, I would like to remind everyone in order to ask a question, please press “star”, then the number “one” on your telephone keypad.

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

Your first question comes from Sam Wilson (ph).

Good afternoon, gentlemen.

A couple of small question force you and then one big one.

First for Steve, can you give us a sense what CAPEX was for the quarter and what you expect CAPEX to be for the remainder of the fiscal year?

Our CAPEX was about $350,000 for the quarter, which is below a little bit of our run rate.

We’ve traditionally been running about $0.5 million a quarter, Sam.

Do you expect it to return to half a million dollar levels?

Yes, I do.

And then, kind of a big question for John.

John, a focus of the company in the last year, give or take, has been to dramatically expand the selling relationships, the channels.

You've got Dell and Nokia, where the relationship is changing a little bit.

And then you’ve got Ingram Micro.

Can you give a sense, as you look out, how you feel about your sales channels now?

Do you think you will continue to grow them over time?

How many resellers are you adding versus ones that you're losing.

Just give us a status level update and a strategic level top-down.

I will do that and then pass it over to Steve Goldman to give you some more detail.

Actually, it's a great question and maybe I should have covered some of this detail in the summary of the quarter because one of the strategic directives, we have a number of strategic directives for the year.

One of them, in fact, is to leverage channel partners, both from a global perspective, from a solution perspective, and from a value-added tactical resale perspective.

We’ve done a lot of work in North America in the last couple of quarters, especially this quarter, where we've been doing road shows to potential and existing value-added resellers, expecting the value-add the reseller can have, if they implement F5 solutions and resell them.

With tremendous success, we’ve actually signed up a significant number of value-added resellers in North America.

I don't know the exact number.

We could get that for you later.

A lot of whom have been Cisco Gold and Silver partners.

Clearly we see that as a way of leveraging the top-line fields without any significant incremental expense.

The more sort of global picture, if you’re really good about where we are here, if you look at on a global basis, whichever area we look at, we get some absolute blue chip names, whether it's companies like NTT in Japan or IBM Global Services in the same area or Hewlett-Packard, Dell, companies like that, real blue chip names, as we're competing with Cisco, we really need to have them.

Then of course with iControl we continue to get closer and closer with companies like Microsoft and Oracle.

Jeff, you may want to comment on what we're doing with Oracle, some big marketing stuff.

Overall, I don't know if that's the answer you're looking for, Sam, but it's a major initiative for us.

I don't know if you can quantify this or maybe Steve Goldman can.

How many resellers do you think you've added in the last year and do you think you can add another X number amount over the next four to six quarters?

Hi, Sam, this is Steve.

We've added roughly 35 or so fiscal year to date, which is just about on plan.

The big thing we're trying to do with the resellers we add that John alluded to is, move beyond our traditional networking-centric or only network-centric channel to partners that also have a server focus and an application focus.

A good example in North America would be Continental Resources, one of Cisco and Sun's largest resellers.

They did quite nicely over the last couple of quarters since we’ve signed them.

So that, plus the various strong international partners are really helping us weave together that network server and application combination, which is what we think is most powerful about the way we're evolving the channel.

And, Steve, do you think you have more room to run in this department?

Yeah, we've actually been focusing more on quality and being very selective than we have on quantity of adding new partners.

I think we're really just scratching the surface.

I think there's a lot of good mileage we can get out of growing our existing relationships, a lot of our global partners like EDS and NTT et cetera, where we just keep seeing good sustained growth.

I think we're still in the early stages of them really grasping the whole application traffic management and getting that into our strategic account base and then in terms of the new partners we've targeted to recruit, a lot of room there.

And probably the most dramatic example would be the large systems integrators.

You know, the Accentures and IBM Global Services where we're just doing, again, I would say a modest amount of business based upon the potential for our types of product.

The real sense we've got in terms of attracting partners is the value-add where they can increase services and margins as a reseller of product either through iControl applications and or the universal inspection engine where they can really tailor their solution, the application traffic management within, say, their specific market niche.

That resonates really well with the partners.

Thank you, gentlemen.

Your next question comes from Alex Henderson (ph).

Thanks.

I was wonder fg you could answer a couple of questions on activity rates.

Have you seen a pick-up in activity at all in terms of the number of deals that you're working on as opposed to necessarily, you know backlog or closed revenue transactions?

Are you seeing any acceleration in activity, particularly around the new products?

That's hard to say.

I think the new products are clearly taking off.

I mean, the 54% to 67%.

I think that's a really strong indicator of that.

I think that is actually pretty consistent globally, in each of our markets.

So the new product being at the early part of the life cycle, that's all very positive, obviously.

And we're seeing some early signs of increasing sales pipeline and some of the other classic things that we measure.

And, you know, of course, all of that’s against the backdrop of world events, but the things that we measure are definitely showing some positive signs.

You are seeing an acceleration of activity in your pipeline, of current deals that you're working on?

Correct.

Can you talk a little bit about what you're seeing in terms of average deal size?

Are you seeing stability or improvement in deal sizes?

You know, it's really much the same.

Not significant.

I mean, we didn't – last quarter we didn't have any million dollar deals and there's been quarters we've had one –don’t think we’ve ever had more than one in a quarter, but we didn't have any in this quarter and overall the deal sizes are pretty similar.

Okay.

So can you explain to me then, why you have expanding distribution, you're seeing some increase in activity rates, stable deal sizes, we're going from a seasonally weak quarter into a seasonally stronger quarter, you’re in the peak of a product cycle, yet your guidance includes a band of numbers that possibly would be down.

That doesn't make any sense to me.

Can you explain to me why that would be the case and why we shouldn't be looking at these as overly conservative guidance?

If you look at the last two years, come on, I mean, spending is really tough in North America.

I think it would not be prudent to assume that the brakes are going to come off fast, they may come off, we’ll see, but we believe that North America specifically, IT spending is tough and your fighting for every dollar.

We think we're doing a really good job at that and we think we're getting market share but there's no way we can give you aggressive guidance at this point.

No one is suggesting that you give aggressive guidance at this point, nit I am trying to parameterize the guidance that you’ve given.

March is historically and even now virtually every company we've talked to suggested March is a seasonally weak quarter, particularly with the bad weather we had for a big chunk of it.

June is certainly a seasonally stronger quarter and you are in a new product cycle which seems to be gaining share momentum.

All I'm trying to do is get a sense of -- your stock's reacting to what I think is negative guidance that could be perceived as negative since the band is possibly down in a seasonably stronger quarter.

I'm trying to get a sense of are we being really conservative here because, gee, the conditions have been bad but, you know, expect to see some growth sequentially?

You made the comment earlier that you expect flat U.S. with upside.

That's not consistent with down.

Right, and we've said -- we've effectively said flat gains with definite potential upside.

In other words, we've increased the range.

Everything is pretty realistic with the data we've got right now.

I think it would be foolish to go any more aggressive.

I'm just trying to understand.

When you give guidance of up and down, that, in fact, that's just being conservative the down part is being conservative given the seasonality and the product cycle, yes?

Last quarter we gave guidance of 27 to 28.5 and, you know, the result was 28.

And this quarter we're giving 27.5 to 29.

Right.

Can you talk a little bit about why there would be pressure on margins?

Are you implying there would be contraction in margins here at the gross level.

It seems to me that your new products out to have pretty good margins on them.

Again, you're seeing a nice mixed shift on your new product.

Yes, Alex, we’ve given the same guidance on margin as we did last quarter in the range of the 75-77% .

So, you know, we expect to really see margins staying in the same -- you know, within a fairly tight band and relatively stable, at least for this quarter.

Again, we should read that as conservative, there was some revenue pressure maybe to come in, assuming your revenues hang in there or increase a little bit, you would probably be okay to have flattish margins.

You should read exactly what we say, Alex.

Okay.

Thank you.

Thanks.

Your next question comes from Chris Hessing (ph).

Thanks for taking my call.

I've got a few questions for you.

It seems you're adding a lot more security features to your product here as of late and I was wonder if you plan on going to a full-blown IDS-type system and positioning it that way or are you just sort of marketing it as added functionality to an existing product?

We're actually not going to do through the details of our product roadmap from a security functionality area in this call.

But you can read between the lines here.

It's about absolutely going to be pretty comprehensive over a 12-month period.

So it will focus on the application level where we think we have tremendous uniqueness and because of the capabilities like XML traffic and application attacks but it will be pretty comprehensive in terms of the functionality.

Okay.

So we could expect more of a fuller functionality layer four through seven switch rather than positioning it as an ideal system?

Oh, I didn't say that.

Okay.

I just said you will see a very functional list of security functionality that will add on top of our ability to do application traffic management.

Okay.

Looking at your OEM relationships, it looks like you've added capabilities there by expanding the Nokia and you talk about expanding to other Dell models.

How close are you to what you would call an absolute ideal relationship?

Is there still a lot more work to be done here or are we pretty close?

In what terms?

Well, as far as what you consider, you know, having an absolute perfect outlet in each OEM.

So, for instance, you started in with Nokia with one of their operating division and now sense expanded it to the entire company.

Is there further room to grow there?

It seems like that one is pretty full but with Dell, how much -- how much more upside is there to that relationship?

Okay.

Do you want to comment on Nokia?

Yeah, just on Nokia, what we've done is penetrated the side of the house, which is, you know the largest portion of their business, to the wireless carriers outside of the mobile handsets.

And there are lots of projects and opportunities there.

We've identified, you know, a handful of them along with Nokia, where our traffic management devices will be bundled to the wireless carriers as new services and features come out, obviously that can continue to expand.

That's somewhat dependent on the new features and services that the operators want to bring out.

And regarding Dell, there's a number of areas for that.

Also its in its infancy in terms of partnership.

Obviously, one is blade servers.

That's just the beginning.

And the other area is the one I mentioned briefly where effectively introducing an ISV relationship, where our software runs on the standard volume Dell server.

Again, that's actually not shipping yet.

We expect that to be available this quarter.

That's really at the beginning of the cycle, if you like.

Okay.

So there's still room to grow within Dell?

Yes, yes.

Okay.

Looking at what Nortel announced with the IBM blade servers, providing the layer 2 through 7 functionality where you basically get a Layer 2 switch from Nortel built into the box and can turn on 4 through 7 features, what type of threat do you perceive there?

Just to be more specific, as you're familiar in the backplane they've put a Layer 2 switch in, which is something not uncommon.

For instance, Broadcom does that with a number of the current blade vendors today.

The layer 4-7 stuff is actually a separate blade that has to be purchased through Nortel.

So -- and it's not available today, by the way.

It won't be available for a while.

So we see an opportunity, actually now that the blade shipments are taking off from the different vendors, to really be established before that product comes out.

And, in addition, have the right sales channel models with those vendors such as reseller agreements with HP, Dell, and others, in terms of custom factory install, that will compete very well.

And from a pricing point of view our understanding is that blade that Nortel would sell would be very expensive.

Okay.

They didn't position it to me as being an additional blade on there, but --

Yeah, I think if you investigate it further, you will -- you will see that.

Lastly, Steve, tax rate end of quarter, what's going on there?

Yeah, the only taxes that we're recording now are from the foreign jurisdictions.

We've not reinstated our tax asset, that likely will happen at some point in the future going forward.

I think we're going to continue to see taxes prior to that reinstatement being in that $200,000 range, all be foreign taxes.

Okay, so as far as the next quarter, all in the $200,000 range?

That would our expectation, yes.

Okay.

Thanks a lot.

Your next question comes from Troy Jensen.

Hey, gentlemen, just a couple of questions here.

I know you said 67% of the systems sales or application switches, could you give us any granularity as far as maybe how many of the 5100s, 2400s or the 1,000s?

We continue to have very good traction on the newly released products from last quarter.

They went from 20% of our total system sale last quarter upon release to just north of 40% this quarter, 43%, to be exact.

So we're very pleased about the acceptance of those products within the marketplace.

And then maybe a question for Jeff.

Any thoughts about the multi-homing product?

Have you guys have success with that product?

And remind me what’s the name of that product?

BIG-IP link controller which allows us to load balance out bound traffic to different ISPs.

Yeah, we've actually had great successes with it.

In fact, shortly you will see a major review of that product coming out, where it is, you know claimed in that review, which is a hands-on review, to be the best product in the industry.

We've had some key strategic wins around the world with that product.

Just a final question.

How about a compression?

I know you view SSL, using the browser for the other piece of it.

Any thoughts about doing the same with compression?

Yeah, I mean -- this is Jeff.

We're planning on doing compression from the point of view of functionality built into the current products.

We have a road map that includes it.

And Brett's team is working on that kind of stuff right now.

Great.

Thanks, guys.

Your next question comes from Matt Barzowskas.

Two quick questions.

In the international, do you have a split between EMEA and Asia?

Yeah, we did about 15% in EMEA, of revenue.

Roughly 15% in Japan and 7% or so in the remaining Asia.

Okay.

And second.

On the blade server did you break out the revenue?

No, we didn't.

That's something that we don't intend to do certainly in the short to medium term until the traction happens.

It actually did -- it wasn't key to the results, but we haven't actually broke that in numbers.

What we've been giving is the actual software number in general.

Okay.

Fair enough.

I guess just the third real quick one.

When you're talking about Dell, it sounded like there was a little shift from the software to the Dell actually distributing product.

Is that just a function that Dell is now selling the product instead of actually OEMing it?

Or was there just more demand in one place than the other, just to clarify that?

Its about both.

The products are slightly different.

Dell's product is effectively an appliance, so it doesn't have a switch involved in it.

Where they take our software, private label it, OEM it with the Dell name, and sell it in the marketplace.

The revenue on that quarter was slightly down.

Not significantly down but slightly down.

The the other revenue is where they just resell our product.

Our products, brand new products which are typically the application switch, which has slightly more functionality.

And that has been -- in fact, that's actually been increasing, that revenue, for a number of quarters now.

So I think, one, the relationship is effectively pooling, the OEM is pooling products into the reseller channel.

Okay.

Thanks a lot, guys.

Your next question comes from Eric Suppiger.

Yes.

First of all, can you give us the break out for what international was the previous quarter?

Yeah, it was about 30%.

What I mean is, you just gave us EMEA, Japan, and Asia.

Can you give us that same break out for the previous quarter?

EMEA was a comparable percentage.

Japan was in the 12% range and apac was just under 5%.

Okay.

I want to revisit the question earlier about your guidance.

The low-end of your guidance does suggest a decline of about half a million dollars.

What could create that decline?

Where do you think the greatest risk comes from?

Probably tough IT spending getting even tougher.

Probably unlikely, but it's got to be an economy issue.

It's certainly not compared to, well, we don't believe that, so the scenario there would be tremendous slippage, more than you've seen in the last two years.

It would take a pretty sharp fall-off in IT spending from current levels to see an actual sequential decline?

I mean, it's effectively $500,000, isn't it?

That's true, you've only raised the range by $500,000 from the previous quarter but your revenue is up a million, so yet I am trying to ensure, we are really talking about a higher level of conservatism rather than a reflection of any changing undamentals?

Yeah, and like Alex's question, we're not going to say we're giving you more conservatism here.

I think we’re giving you a realistic range, like we did last quarter, we went toward the top end of the range.

We’ll see what happens this quarter.

Okay.

And finally, with the three new switches.

The 1000, 2400 and 5,000, which of those are your biggest revenue-generators at this point?

I'm not sure we've got that -- we can get that data to you actually.

I don't think we've got that granular.

Let's work on that and maybe we can give it later on in the call.

Okay.

Thank you very much.

Okay, thanks.

Your next question comes from Gary Osternack (ph).

Good afternoon.

On the blade server I think you made a comment that blade server revenue on the quarter, I don't know if you said it was material or not material?

I said it was material.

It was material, okay.

So, , meaning like 5% of revenue?

No, meaning an effect on earnings.

An effect, a positive effect on earnings?

Yes.

Is it material to revenue on the quarter?

We're not giving out the blade server number.

Pardon me?

We're not giving out the number.

Only the total software number.

What was the total software number?

5%.

So that --

That was a portion of that.

So the total software as a percentage of revenue is similar to prior quarters?

Yes.

Okay.

Is the iControl services manager software that was noted in the press release, is that included in the 5%?

It is included as software revenue.

Our sales were very small, deminimus level of sales.

It was right at the end of the quarter we started shipping that.

Okay.

And with the Nokia agreement, the press release stated that there was some custom development work going on.

Are you guys getting reimbursed for that is that something that you're expensing?

Basically, that's the Net Act integration.

Net Act is their product which manages all the devices within a network operator's -- wireless operator's environment and we're building a simple interface through our iControl capability into that product and we are doing that work.

And is that being expensed or capitalized until --

Expensed.

It's not significant.

It's not significant, okay.

And was the -- I guess the OEM sales to Dell, which is – which is really the software license revenue; is that correct?

Yes.

So that was down slightly.

How about the Nokia, was that --

The Nokia was actually down slightly as well.

So I guess the blade server made up for the decline in those.

Yes.

That’s correct.

Okay.

Thanks.

Thank you.

At this time, there are no further questions.

Okay.

If there's no further questions, thanks for listening and we'll listen and talk to you next quarter.

Thank you.

This concludes today's F5 Network Conference Call.

You may now disconnect.