F5 Inc (FFIV) 2003 Q3 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the third quarter financial results conference call.

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

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

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

Thank you.

Mr. Eldridge, you may begin your conference.

Thank you, Toni.

Good afternoon and welcome to our third quarter 2003 conference call.

During today's call we will review F5's third quarter results, discuss the company's acquisition of uRoam, and provide guidance on the company's future performance that reflects the expected impact of the acquisition.

Steven Coburn, Senior Vice President of Finance and Chief Financial Officer, will begin the call with a review of the company's financial results for the third quarter.

Next, John McAdam, President and CEO, will summarize the operational highlights of the third quarter and briefly discuss F5's reasons for acquiring uRoam and how this moved is aligned with the company's long-term strategy.

Following John's comments, Jeff Pancottine, Senior Vice President of Marketing and Business Development, will present a more detailed look at the way uRoam's products dovetail with our current product line and how we plan to integrate the uRoam technology into our product road map.

After Jeff's presentation, Steven Coburn will briefly discuss our expectations regarding the sale of uRoam products, the likely impact of the acquisition on F5 earnings and specific guidance on F5's financial outlook for the current quarter ending September 30.

John McAdam will conclude the company's prepared comments with additional perspective on the company's outlook.

Then we will open the call for questions.

Along with today's speakers, Julian Ames, Steve Goldman, Senior VP of Sales, Jeff Stockdale, Senior Vice President of Product Development, and Skip Glass, CEO of uRoam are also present and will be available to answer questions during Q&A.

Copies of today's releases and the slides that Jeff Pancottine will be using during his portion of today's presentation are available online at www.f5.com.

Following today's call, you can listen to a telephone reply at 800-642-1687 or 706-645-9281.

The conference call ID is 1222474.

The telephone replay will be available until midnight Pacific time tomorrow.

In addition, an archived version of today's live webcast will be accessible from our website through August 7.

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 our quarterly release and described in detail in our S.E.C. filings.

All statements on today's call, including guidance about the company's future financial performance, are based on information that is believed to be true and accurate as of this date.

F5 undertakes no obligation to update any forward-looking statements, to reflect new information, events, or circumstances after the date of this call or to reflect the occurrence of unanticipated events.

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

Now, I'll turn the call over to Steven Coburn.

Thank you, John.

As John indicated, my comments today will be divided into two parts.

First, I will review the financial results for the third quarter of fiscal 2003.

Following Jeff's discussion of the uRoam acquisition, I will discuss the financial aspects of the deal and provide guidance for the current quarter ending September 30.

For the third quarter fiscal 2003 F5's revenue and earnings exceeded the targets we set in our April 23 conference call.

Revenue of 29.2 million was above our 27.5 million to 29.0 million guidance.

Net income of 1.4 million or 5 cents per share was also above our guidance of two to four cents per share.

Quarter-over-quarter we saw sequential revenue growth of 1.2 million or 4.2%.

Of this, product revenue increased 4.8% with service revenue growth of 2.6%.

North American sales, which accounted for 65% of total revenue, were stronger than we had anticipated.

International, at 35% of total revenue, saw growth in Asia-Pacific partially offset by expected lower revenue in Japan following the seasonally strong March quarter.

The mix of systems, service, and software was similar to last quarter with systems representing 68% of total revenue, service 27% and software 5% .

Demand for our products was strong across all regions with switch products accounting for almost 70% of total system sales, and the newer switch product, BIG-IP, 5100, 2400 and 1000, representing 53% of total systems sales.

Although software sales were comparable to last quarter, we did see a strengthening of the blade controller sales pipeline coupled with some enterprise account wins that John McAdam will reference in his comments.

Among the factors contributing to the strength in North America were several large strategic wins by our global accounts team, including four that totalled more than 2.5 million.

During the quarter we also continued to build momentum in our channel program, and we began to see meaningful contributions from resellers we signed up during prior quarters.

Ingram Micro, at 12.2% of revenue, was our only 10% customer for the quarter.

Moving down the income statement, gross margin for the third quarter was 76.8%, at the upper end of our 75 to 77% target range and unchanged from the prior quarter.

Total operating expenses of 21.2 million were within our 20.9 million to 21.3 million guidance.

On the balance sheet, accounts receivable DSO ended the period at 63 days, below our guided range of 65 to 70 days.

Inventories ended the quarter at just under $700,000, and cash flow of 3.4 million represents the 9th consecutive quarter of positive cash flow from operations and helped boost cash and investments to 96.8 million at quarter end.

Now I will turn the call over to John McAdam who will briefly discuss key operational issues that contributed to our Q3 results and share his perspective on F5's acquisition of uRoam.

Later in the call I will discuss the financial aspects of the deal and our combined outlook for Q4.

Thanks, Steve, and good afternoon, everyone.

As Steve outlined in his summary of the quarter, the overall results were very solid, and I was very pleased with our progress.

All the geographies either, exceeded, or came very close to meeting their plan, in particular the North American business, which represents approximately 65% of the total, had a very strong quarter fueled by a number of large wins, as well as a ramp in new channel business.

Our service business continued to grow sequentially, and given the increase in the deferred revenue backlog, we expect that growth to continue into fiscal year 2004.

Product sales met expectations across all the product lines, including the newer BIG-IP 1000, 2400 and 5100 products.

The blade server software sales were still relatively modest, but we did close some great blue chip names last quarter with sales to Wells Fargo, Sony's PlayStation, Priceline, and the South African government, as some examples.

The Sony Playstation sale was the first sale of our software on an IBM blades.

The other wins were spread across HP, Dell, and Seimens.

We continue to see blade wins in areas of enterprises where we would not normally see our products being sold, and in several cases this has allowed us to look for opportunities where we can use the blade sales win to leverage our core BIG-IP product sales, as well.

Other software revenue channels, in particular sales to Nokia and Dell, were pretty consistent with last quarter.

Clearly the highlight of the quarter was the performance in North America.

Our strategy of partnering with premier solution partners like Microsoft and Oracle is definitely working well.

We had over a hundred sales wins in Q3 which were leveraged by our iControl partnerships and accounted for approximately 30% of all product revenue.

Also, the efforts we made earlier in the year to sign up new resellers like Cisco gold and silver retailers, as well as Sun retailers, is definitely starting to show incremental growth.

We had some great customer wins in the quarter, including large wins at Washington Mutual, Double Click, Bank of America, Blue Cross/Blue Shield, GE, Australian Department of Defense and Toyota Thailand.

It's also interesting to look at the list of technology companies that purchased product from us last quarter.

The list include Oracle, Microsoft, Veritas, IBM, Web Methods and others, clearly a great endorsement of our technology.

I will talk about our future outlook toward the end of the call after Steve Coburn goes through the financial outlook in detail.

However, let me also take a few minutes here just to briefly comment on the recently announced acquisition of the assets of uRoam corporation.

I mentioned in our last quarter's call that we had started to add security features to our solution portfolio like denial service functionality.

I also stated that our leadership in traffic management uniquely positions us to add more security features and provide dynamic enforcement and intelligent protection at the application level for mission-critical applications.

The combination with uRoam is a very significant step in our goal to be leaders, not only in application traffic management, but also in application traffic security.

Most security products today, for example, the traditional firewalls, do not do deep packet inspection of application content, and really only do packet filtering at the header level.

At F5 we have always been differentiated by our leadership in deep packet inspection, which clearly gives us a huge opportunity as the demand for security at the application level increase crease.

I believe the uRoam acquisition is a major and exciting milestone for F5 for a number of reasons.

It comes with awesome technology, some really impressive customer names like SAP and Fed Ex, a fantastic team with superb application security skills, and a market opportunity, namely, SSL VPN, that could be larger than our current traffic management market within two or three years.

We already have significant skills in the SSL environment, and, obviously, we will look to leverage our customer base of approximately 5,000 customers plus our global channel partners to produce incremental revenues as soon as possible.

The SSL VPN market is really just in its infancy with no real dominant player and F5 is in great shape to take advantage of this opportunity.

Let me now hand over to Jeff Pancottine who will talk about this opportunity in more detail.

Thanks, John.

Today security concerns are at the top of mind for every enterprise.

Insuring that the appropriate users are accessing the correct applications and data at the right time and place is paramount to securing corporate assets.

By joining forces, F5 and uRoam have the technology, products, skills and resources to provide the best possible solutions for enterprise application security.

I'm going to move on to slide 2 for those of you that are following online.

F5's vision has always been driven by the needs and requirements of our customers.

As security has become more and more critical, we have continued to add security capabilities to our product line to address customer needs.

This includes SSL encryption/decryption, DOS mitigation, authentication, authorization, and many other features currently available in BIG-IP today.

F5's goal is to provide complete optimization of IP applications by delivering easy to deploy and manage solutions that scale applications over the network in a reliable and secure fashion.

Our acquisition of uRoam is another important step in fulfilling this vision.

Slide 3.

It is clear that attacks on the enterprise and its core applications and data are rapidly increasing at an exponential rate.

In fact, these intrusions are not only growing in numbers, but in their level of sophistication.

In the first quarter of 2003, incidents reported are already half of what they were for all of 2002.

Automating the process of mitigating sophisticated application level security breaches is the only way to cost effectively stay ahead of this exponential curve.

In doing so, technologies and products like uRoam's FirePass and F5's BIG-IP, with universal inspection engine for deep packet inspection at gigabit speeds, can ensure user application and data security.

Slide 4.

Application security is key to F5's market expansion strategy.

Over the course of the next two to three years, we believe our addressable market can grow to over $3 billion U.S..

Along with our core traffic management market, application security, blade opportunity, Mobil IP, and web services gives the company plenty of room to grow revenues.

Application security will be a large component of that growth.

Currently today, the market for Internet security software products is approximately $8 billion U.S.

We believe a growing component of that will be spent on application level threats over the next few years.

This will be at the expense of existing network-based firewalls, IP VPNs and intrusion detection systems.

Slide 5.

Now for some background on uRoam.

The company was founded in 1998 and is headquartered in Sunnyvale, California.

There are approximately 20 people in the company, with the majority in product development, sales, and service.

uRoam's FirePass SSL VPN product is a comprehensive remote access product with broad application and platform support.

The FirePass product enables any user to access any application from any device in a secure fashion using industry-standard SSL technology.

It easily integrates into any security architecture and reduces costs in comparison to current Legacy remote access solutions.

The company has a number of large enterprise customers, such as SAP, Fed Ex, and Ball Corporation, who have standardized on the FirePass solution.

From a market, customer, product and technology point of view, uRoam and FirePass mesh extremely well with F5.

Slide 6.

Introduced in early 2000, uRoam's FirePass was the first available web-based remote access product.

It is still the leader in functionality, reliability, and scalability.

Users can access applications from laptops, client offices, airport kiosks, cyber cafes, pretty much anywhere.

All of this geographic flexibility is mirrored by access through any device, such as PC browsers, internet-enabled phones, or PDAs.

Application access is comprehensive, including e-mail files, Internet servers, client server apps, legacy mainframe apps, terminal servers, et cetera.

At the same time, there is no need for client-based software, saving IT time and money while simplifying the user's life.

Slide 7.

Core to the FirePass's capabilities is a very mature and sophisticated policy engine.

The dynamic policy engine provides adaptive client security to insure correct content access depending on the device type, flexible authentication through standard L-DAP and radius databases, rigid access rights to specific applications, and auditing at a fine grain level.

This means any level of policy can be I be implemented easily.

Combined with the ability to provide access to any device through SSL, to any application through webifiers and connectors, FirePass far outdistances its competition.

Slide 8.

While there are a number of companies who have been in the SSL VPN market or have announced their entrance recently, only the uRoam FirePass product delivers a full suite of necessary functionality.

Some others such as Neo Terrace (ph) have been able to market and sell fairly effectively, but with F5's distribution capability, customer base, and position and real estate in the network, we feel confident that the FirePass solution will gain ground quickly.

Most everyone can provide simple web-based internet access in the SSL VPN market, however, when it comes to integrating existing applications, such as legacy systems, client server apps or terminal services, only the FirePass product provides true clientless IP SEC VPN replacement.

Slide 9.

Overall, most analysts who watch the security market agree that client list remote access SSL VPNs like FirePass will quickly surpass IP SEC VPNs.

The basis for this is the simplicity of use, ease of management, and reduced client side complexity.

All in all, these devices provide superior capability and save significant money.

Infonetics (ph) believes this market will grow from approximately $50 million to over $900 million by 2006.Given that most people are suspect of market forecasts, even with those forecasts lowered by 50%, it's still explosive growth and significant opportunity as a stand-alone market.

Slide 10.

So, needless to say, we're bullish on the opportunities that combining uRoam and F5 provide.

If we look at the spectrum of application security from simple and secure access to full secure application traffic management, F5 and uRoam current and future products will be the leading solution for ensuring end-to-end application level security.

F5 delivers the ability to manage and act as an enforcement point for security devices in the network, detect network level attacks and deeply inspect all traffic and content.

On the other hand, uRoam enables simple and secure user access, authentication, authorization, complete accounting of all user activity and is able to restrict application access.

When combined together, we can deliver the necessary tools to keep unauthorized application access to a minimum and weed out any undesirability activity in the network that could affect an enterprise's data or applications.

Slide 11.

From a business point of view, this makes sense for the customer.

They have access to a highly available and scalable remote access solution, a road map to full application security, a strong supplier with worldwide distribution and service, and cost savings through reduced complexity and consolidation.

For uRoam it provides strong distribution and sales access, a strong recognized brand, complimentary networking expertise, and strong financial support.

And for F5, we leverage our #1 position in the SSL market today, enter into a related growing market providing security product for our sales and channel, complimentary expertise in the applications space is gained, and we gain a key set of skills and technology for our long-term expansion plans.

So, how does this fit into F5's longer term plans?

Slide 12.

Well, we see some significant problems with currents network level protection of the enterprise.

This refers to currents firewall VPN, IDS, et cetera, type applications which only protect the outside shell of the network.

These devices do not protect against application attacks.

Unauthorized users at valid terminals or invalid transactions from valid systems can still penetrate this shell and have unobstructed access to corporate data and applications in the same way valid users and transactions do.

Most of the newer threats are using these more sophisticated and complex attacks on network applications.

SQL slammer worm is only one of many application level attacks costing enterprises significant amounts of money to mitigate after the fact.

Slide 13.

By combining current F5 technology for deep packet inspection through our universal inspection engine and uRoam technology, we will be able to provide complete application security from user to data.

This "application security gateway" will insure that only valid users and transactions get through to the applications and data they are authorized to use.

Considering that close to 70% of security breaches are internal, this capability is as important for an enterprise's own users and transactions as it is for external access.

The analogy is like airport security.

Having a ticket and ID allows a person into the airport, somewhat like a current network firewall and VPN in an enterprise network.

But scanning and screening stop invalid contraband from getting onto the plane once in the airport, like deep packet inspection and BIG-IP.

In addition, your ticket only allows you on your specific flight, much like authorization and access rights allow you to gain access to only those applications and data you have a right to use.

Once on the plane and in flight, air traffic control manages getting you to your destination.

Similarly, BIG-IP and 3-DNS ensure that application traffic gets to the correct data center, server, and application.

Slide 14.

Over time, F5 has added significant features to BIG-IP for security, including universal inspection engine, DOS mitigation, SSL encryption/decryption, AAA, et cetera.

While providing great security features, F5 has not had a security product per se.

In acquiring uRoam, F5 gets access to its people, technology, products and customers in order to enter a rapidly growing segment of the security market.

By combining these efforts over the next few quarters, we will deliver an industry-leading application security gateway that will provide complete protection from sophisticated threats to the enterprise.

Slide 15.

Our comprehensive approach to application security will deliver edge to core assurance that inappropriate user access and invalid traffic will not jeopardize enterprise applications.

This will be done at gigabit speeds, with the ability to scale, and in a highly available fashion for mission-critical applications.

In essence, delivering on the vision that we have promised to our customers and helping us drive the growth we need to satisfy our investors.

I'll now turn it over to Steven Coburn.

Thank you, Jeff.

The financial aspects of the uRoam acquisition are relatively straightforward.

For 25 million in cash, F5 has purchased the rights to all of uRoam's developed technology and intellectual property.

Further, we have executed employment contracts with 20 of the company's 24 employees including key development and sales personnel.

Our immediate activities for the remainder of the quarter will focus on the education and training of our sales force and channel partners in the uRoam product set.

Although we will likely see early sales in September, we do not expect that revenue stream to be material in the current quarter.

Looking further out, we believe uRoam product sales will grow sequentially in future quarters with targeted revenue in the range of 8 to $12 million for fiscal 2004, and 12 to $15 million for calendar 2004.

Taking into account operating expenses for uRoam in security applications, along with amortized acquisition costs, we expect a reduction in overall EPS of 4 to 6 cents per share for the current quarter.

Longer term we expect uRoam to contribute positive earnings beginning in Q3 of fiscal 2004.

Including the impact of the uRoam acquisition coupled with the projected growth in our core business, we have set a fourth quarter revenue target of 29.5 million to 30.5 million.

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

Operating expenses, including approximately 1.4 million in expenses related to uRoam, are currently targeted in a range of 22.5 million to 22.9 million.

As a result, we expect our Q4 earnings to be in the range of 2 to 3 cents per share.

We believe PSOs will likely be at, or near, 65 days, and inventory levels are targeted to be approximately $1 million at quarter end.

Combined cash flow from operations is projected to be in the range of 2 to $3 million.

In conclusion, we are delighted to be able to add the uRoam technology to the F5 product family.

At approximately two times projected revenue for calendar 2004, we believe uRoam is a sound investment that provides us with a cost effective entree into the security market.

At the same time, we believe that we can maintain profitability and positive cash flow during the next several quarters, as we further develop and integrate these products.

With that, I turn the call over to John McAdam for closing remarks.

Thanks, Steve.

Let me just close by adding some color to Steve's comments on the outlook.

As Steve mentioned, we see revenue in the 29.5 to 30.5 million range in quarter 4.

Q3 was really solid with good sales momentum throughout the quarter.

Clearly, we will be keeping a close eye on any summer seasonality issues, particularly August, which tends to be slow.

However, assuming our current sales momentum continues and we have already seen positive moment up during July, I would expect to see us having another strong quarter, reflecting continued sequential growth from our core traffic management business.

We expect the first partial quarter with the uRoam product to be light while we concentrate on integration and cross-training, but I have to say that I'm really excited about F5's future prospects, and I believe we move towards fiscal year 2004 with great reason for optimism.

Let me now 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 1 on your telephone keypad.

Your first question comes from Alex Henderson of Smith Barney.

Yeah, thanks.

Just to make sure I've got the numbers correct here, you're saying your op ex is 22.5 to 22.9 in the period?

Does that include the amortization cost?

Yes, it does.

That would include amortization of deal costs.

And the amortization for the quarter would be what?

You know, we're still --

Just approximately.

I think they're gonna be in the range of $200,000 to $300,000.

2 to 3 hundred.

Thank you.

The operational question, it sounds like your base business saw some pretty good improvement over the course of the quarter.

Can you talk about the sense of activity as you went through the quarter, linearity during the quarter, the general tone of whether, you know, the business accelerated over the course of the quarter, how the bad bars were ramping up?

It sounds like you've got some pretty good visibility here.

I understand the question.

No, it was very strong rate throughout the quarter.

So we started off, and what we do is we check weekly and we compare that with the quarter before and the quarter before that, and the quarter started off really strong and continued that way.

So, it was continually above the line of the previous quarter effectively every week.

And as I mentioned, we've seen some good growth in July, as well.

So, the bad VAR channel expansion really is ramping up into the back half.

Isn't that going to be more of a positive as we get into the tail end of the calendar year, though?

Yeah, we'll see.

I mean, we're doing it one quarter at a time.

Obviously, with a caveat, in August, and we'll view that .

But if the channel revenue keeps ramping, I think that's possible.

Great.

Looks like a great acquisition.

Your next question comes from Matt Barzowskas of First Albany.

Thank you.

Talk a little more about acquisition.

First of all, just want to say from a customer, do you see it as a new customer base our your traditional customer base?

Also, how are you gonna lead with that product?

Is it gonna be a separate technology or is it just gonna be part of your overall offering?

And with the channel, is it a new set of channel players you're gonna work with or is it the same guys?

Yeah, this is Jeff.

Well, basically, it's a really interesting proposition.

The value proposition is very clear and very straightforward.

Ease of use, ease of management, and major cost savings.

Relative to our current channels, many of our current channels, in fact, the majority of them also sell security products.

So, they already have the ability to resell this type of a product.

So, we believe, and I'll let Steve comment afterwards on this, that they'll pick this up very quickly.

In terms of how we're going to sell the product, today it is a stand-alone product called FirePass, and we'll continue down that path.

Over time, as I mentioned, we will integrate pieces of that technology and pieces of BIG-IP to create other security platforms.

And there may be the opportunity for software modules built out of these technologies to run on BIG-IP.

Hey, Matt, this is Steve Goldman.

Yeah, I agree with what Jeff said 100%.

There's really good overlap in our existing channel.

And one of the things we're going to do fairly early on is roll this out to our own field.

This product has the benefit of being easy to use and easy to demonstrate.

Probably a lot of people listening on this call have experienced personally the frustration of remote access.

I'm really excited about how quickly our folks are going to be able to learn this, and then the sales forces of our partners, as well.

Can you talk a little bit about -- you looked at all the competition out there.

Was there anyone else you looked at before you went ahead and bought this one?

All I can tell you is we looked around the market and saw uRoam and felt their technology and products were the strongest functionally and the most mature out there.

Okay.

Thanks, guys.

Your next question comes from Chris Sessing of Crowell, Weedon.

Thanks for taking my call.

Got a couple of questions on the acquisition, as well.

What do you expect the gross margin impact to be going forward?

Obviously, you said minimal revenues, if any, in Q4.

But what about into '04?

This is Steven Coburn.

On a unit level these gross margins are going to be comparable or above the gross margins that we've seen before, so we're not really expecting any dilution of our margin from that.

The question is, depending on the allocation of some of the purchase price, will we amortize some of those, for example, develop technology costs against gross margins?

If so, there may be some effect.

But on a pure economic unit level, it's going to be comparable or better than.

And in terms of looking at next year, Steve gave you an indication of what we believe for both the financial and the calendar year.

So, we would expect financial Q1, calendar Q4 to be above the million dollars.

Okay.

And then looking at the technology, you guys talk about security a lot.

This is, if I understand correctly, it's a firewall and VPN in one, and you guys talk about an end-to-end security solution.

But you're still missing the IDS portion, correct?

Well, the uRoam products are an SSL VPN product today, so they provide secure remote access for any type of application or user or device.

What I was referring to is a future product which basically combines the capabilities we have today in BIG-IP, which are very firewall-like in terms of deep packet inspection and very IDS-like, with this capability to provide an application security gateway, a brand new type of product which will secure applications and data in the network.

Okay.

So, this is not a firewall, then.

No.

So, any customers looking to, you know -- the combinations out there now are a firewall VPN using the IP SEC, so you're looking at adding another layer to the network infrastructure if they go with an SSL solution.

No, not at all.

Actually, remote access by IP SEC products will still be out there.

This is a cheaper, more cost effective way of doing the same thing.

Okay.

And then just lastly, the Nokia product that you've been selling into, they're using a firewall IP SEC VPN.

Do you expect any sort of, you know, any sort of issues there with that relationship now that you're selling a competing product?

Not really.

I mean, time will tell, but I don't think so, for a number of reasons.

First of all, the relationship we have with Nokia is a much broader relationship, that we talked about in last quarter's call where we were looking at doing some mobile fills there, with our products involved in their mobile solutions.

That's one side of it.

The other side of it is if you look at Nokia's portfolio right now, they have some products from Checkpoint, and they also have some products that compete with Checkpoint, and that seems to be a very workable relationship, so it's no different from that.

Okay.

I have more questions, but I'll jump back in the queue.

Thanks, guys.

Your next question comes from Mark Sue of C.E.

Unterberg, Towbin

This is Mark Villanova representing Mark Sue.

My question is how do you deal with all the demand trends developing, specifically broken down into North America and Asia as we move into the September quarter?

Did you say demand for North America, and Asia?

Yeah, the demand trends.

Okay.

Yeah, that's a good question, actually.

If we look at the coming quarter we're in, which I think was the question, we expect North America to remain strong and keep that momentum going.

We expect to see some growth in Japan because, remember, that dropped a little bit because it was after the financial year.

And we expect to see some modest growth in the rest of Asia, as well.

Europe will probably be in the sort of flat scenario given the seasonality, which is pretty typical of Europe.

Excellent.

Thank you.

Your next question comes from Sam Wilson of JMP Securities.

Good afternoon, gentlemen.

Just a couple questions.

One is, John, can you just talk a little bit about the blade server market?

It sounds like it's picking up a little bit of momentum.

You mentioned IBM, and they mentioned on their call that they shipped, I think, 9,000 blades this quarter.

Just give us kind of an update to what's going there.

And then for Steve, can you give us the head count and what cap ex was for the quarter?

Okay.

On the blade market, first of all yeah, it's picking up momentum.

But I've gotta tell you it's still reasonably slow. 9,000 blades sounds a lot, but if you divide that by an average of 10 blades per [INAUDIBLE], that's 900 systems, which is quite a small number.

And the real issue for that is when those applications become mission-critical.

So, with that caveat, it's been a little bit slow.

Having said that, as I mentioned, we had some really good wins and very, very incremental-type wins, as well.

We only started shipping the IBM software right at the end of the quarter, and that was the indication I gave at the beginning of last quarter's conference call.

And the Sony online deal that we did, we think is a very good one.

It's a [INAUDIBLE] area for online gaming, and obviously, could lead to bigger opportunities.

So, still modest.

We do expect to see some growth again this quarter.

We do expect to see some blue chip names, but it's still going to be in the smaller range.

The other thing that I mentioned, that's maybe, actually, worth putting a number behind, is that I said that one of the things we're finding is that we try to sell some blade software were winning some of the core product business, as well.

We did some sums in there, and we got to about 500,000.

So, that gives you a feel for the sort of general incremental business here.

I wish it was going faster, but, you know, winning good blue chip names.

In terms of the head count, we ended the quarter at 480 heads and capital expenditures were just under 600,000.

And you'll add 20 next quarter with uRoam.

Any plans to change head count in general?

I think we're growing to be in that 500-ish.

There may be a few --

A small amount in product development we'll be doing, but not much more.

Any plans to expand the sales organization?

During this quarter?

Over the next year?

Yes.

But we're not going to say exactly by how much.

But I'm pretty sure we'll be putting growth in at the sales force next year.

Okay.

Thank you very much, gentlemen.

Your next question comes from Tom Tedesci of Continental.

My question mainly has to do with the Nokia sale.

I know they originally owned 9.4% of the stock and now they own [INAUDIBLE] percent of the company and they've reduced that to 4.7%.

I wanted to know if you could talk about that and see why they did that.

I know they originally had the right to purchase another 10% of the company, and obviously, they chose to sell.

Yeah.

That was a year ago, almost a year ago they had the right to purchase.

They've not had the right all during this calendar year.

I knew we'd get the question, but we can't really comment on the reasons.

I mean, that was their decision.

It didn't seem to have much effect in the stock.

I don't believe it's going to affect the partnership.

It's a move on scenario.

Okay.

That's good.

Your next question comes from Preston Rayson of Rassin Capital Management.

Hi.

Foundry's been talking recently how, I guess, when the telecom market kind of fell by the wayside two or three years ago, they've lost the market and it's pretty much yours, and [INAUDIBLE] the copper-based solution that they are ramping now, they talked about actually coming -- kind of coming back into the markets in the balancing.

In general they're gonna try to make a bigger effort.

[INAUDIBLE] in the last three, four weeks.

And the second question is how linear is the quarter?

Because it seems to me that again, we're looking at the group varying between 20 and 40-day DSOs and your DSOs still seem to be above 60 days.

So, talk about those two things.

Thanks.

I'll comment on Foundry.

I'm not quite sure what the question was, but we don't really see Foundry that often at all in our deals, in competitive deals.

It's mainly Cisco.

It's us and Cisco.

And so, I know that they have backed away from the market, as well, but we haven't seen any pickup in any sense of the word from them, either.

So, --

Yeah, regarding the DSOs, we've said in a number of calls, for actually a couple of years now, that we expect the DSOs to be in the 65 range, and obviously, there may be some improvement in that, but not much.

We have customers like GE that have got reasonably long payment terms, which they have with all of their suppliers.

Ingram Micro is similar, that's our 12% customer.

So, we think it's going to be in the mid 60s range.

As you can see, we've been [INAUDIBLE] for, I think, it's 10 quarters know.

So, we think we're very much in control there.

Yeah, you know, over time, over the last six quarters we've just progressively seen the DSOs improve.

And we're fine, we're very comfortable with where it is.

Thanks.

If you would like to ask a question, please press star, then the number 1 on your telephone keypad.

Okay.

As there's no more questions, thanks for listening to the call and we'll talk to you next quarter.

Thanks a lot.

Excuse me, sir.

Okay.

You do have one question.

Okay.

Let's have it.

Okay.

That is from Troy Jensen of Dougherty and Company.

Hey guys.

Just one quick question.

Do you still anticipate that the software contribution in the fourth quarter will be close to 10%?

No.

I think if you look at it, it was about 5% this quarter.

And obviously, it's related to how fast we grow the core business, product revenues.

It's probably going to be -- looking at this quarter, it's probably going to be pretty similar.

Nice job, guys, and good acquisition.

Thanks a lot.

There are no further questions at this time.

Okay.

Thank you.

And as I was about to say, we'll talk to you next quarter.

Thank you.

Thank you.

That concludes today's teleconference.

You may now disconnect.