F5 Inc (FFIV) 2003 Q4 法說會逐字稿

Welcome to F5 fourth quarter and fiscal 2003 financial results.

All parties will be in a listen-only mode until the question and answer session.

Today's call is being recorded.

If you have any objections, please disconnect.

I would like to turn the call over to Mr. John Eldridge, Director of Investor Relations.

Thank you Sir, you may begin.

Good afternoon, thank you, and welcome to our fourth quarter and fiscal 2003 conference call.

Speakers on today's call are John McAdam, President and CEO and Steve Coburn, Senior VP and CFO.

Jeff Pancottine, our senior V.P. of Marketing and Business Development is also present and will be available to answer questions during the Q&A period.

Steve will begin today's call with a review of the financial results for the fourth quarter in fiscal year 2003 and our current outlook for the first quarter of 2004.

Next John will review the company's operations during the past year, and comment on F5's current business strategy, market position, partnerships, and product direction.

We will then open up the call up to questions.

If you don't have a copy of our press release, you may access a copy through our web site www.f5.com, in addition, an archive version of today's live web cast will be accessible from our web site through November 14th.

From 4:30 p.m. today and until mid night Pacific Time on Friday, you can also listen to a telephone replay at 1-888-5660078 or 402-998-1649.

Conference I.D. for the replay is 1959389.

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

These forward-looking statements involve risk 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, described in detail in our SEC filings.

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

Thank you John.

For fiscal fourth quarter ended September 30, revenue and earnings exceeded the target of $29.5 million to $30.5 million and two to three cents per share we set on our July 23rd conference call.

Revenue of $31.6 million was up 8% from $29.2 million in the prior quarter, and 17% from $27.1 million in the fourth quarter of fiscal 2002.

Net income for the quarter was $1.4 million, or five cents per share, equal to last quarter, and markedly better than our net loss of $423,000 or minus 2 cents per share in the fourth quarter a year ago.

The reported net loss for Q4 last year included a one-time charge of $500,000 related to our exit from the cash business in Jewell July of 2002.

For fiscal 2003, revenue of $115.9 million was up 7% from revenue of $108.3 million a year ago.

Net income for the year was $4.1 million or 14 cents per diluted share, compared to a net loss of $8.6 million, or minus 34 cents per share a year ago.

First I will comment on the results for the quarter, and then I will discuss the result for fiscal 2003.

Total revenue for fourth quarter reflected a mix of 68% systems revenue, 27% service revenue, and 5% software sales.

Application switch products accounted for 67% of the systems revenue.

Appliance sales at 24% of the total systems revenue included $543,000 of revenue from the FirePass, SSL VPN product we purchased from euro mink in July of this year.

Domestic sales accounted for 63% revenue, and international accounted for 37% reflecting renewed strength in Japan and continuing strengthening in North America.

Incremento at 14% of revenue was our only 10% customer for the quarter.

Moving down the income statement.

Gross margin came in at 76.5%, comparable to recent quarters and near the top of our target range of 75 to 77%.

Product and service gross margins were 78% and 73% respectively.

Operating expenses of $22.2 million, included approximately 1.1 of incremental costs associated with our acquisition of URoam, also included in G&A expense which is a one time benefit of approximately $250,000 related to settlement of a previously reserved exodus accounts receivable.

Total Uroam costs in the quarter were $1.4 million in lying with our guidance.

In addition to the $1.1 million of operating expense, we had $100,000 of amortized technology costs included in cost of goods sold, and $150,000 of tax expense associated with good will and amortization for tax purposes.

Chief metrics for fourth quarter included several notable items.

Accounts receivable DSO of 55 days was below our target range and better than last quarter's 63 days.

This resulted from favorable timing of collections, continued success in our collections activity, and improved sales linearity.

Inventories of $762,000 were also below our target of $1 million. $5.6 million in cash flow from operations exceeded our guidance, and contributed to net cash equivalent to the investments totaling $79 million at September 30.

Capital expenditures totaled $708,000, and we ended the quarter with 507 employees.

Now I will briefly review the result force fiscal 2003.

The year-over-year increase in annual revenue from $108.3 million to $115.9 million reflected three consecutive quarters of revenue growth beginning in Q2.

Annual net income of $4.1 million, or 14 cents per diluted share represent an increase of 48 cents year-over-year on as-reported in EPS, and 34-cent increase excluding the one time charges in 2002.

Now a quick look at key metrics on a year-over-year basis.

Those margins increase 500 basis from 71.8% in fiscal 2002, to 76.8% in fiscal 2003.

Operating expenses including a partial quarter of expenses associated with the UM acquisition were $84.8 million down from $87.3 million in fiscal 2002, as reported, and up roughly $800,000 from the 2002 expenses before one-time charges.

Inventory levels, net of reserves increased modestly from $349,000, at the end of fiscal 2002, to 762,000 at the end of fiscal 2003.

VSO's (Ph) continued to trend down during the year from 68 day, as year an ago to 55 days in the quarter just ended.

The company generated nearly $15 million in cash flow from operations, an increase of roughly $5 million over the previous year.

After spending $27.4 million to acquire UM, cash equivalent in investments at September 302003 were $79 million, compared to $80.3 million at the end of fiscal 2002.

Just about any standard fiscal 2003 were a year of solid achievement for F5.

We'll move on the outlook.

Based on strengthening demand reflected in our growth over the past three quarters, we believe the company can continue to grow profitably in the current quarter.

For the first quarter of fiscal 2004 ended December 31, we believe we can achieve revenue in the range of $32 million to $34 million.

We expect gross margins to remain at current levels within the range of 76% to 77% percent.

Operating expenses are currently targeted in a range of 23.4 million to 24.2 million.

This tree direct as full quarter of Uroam expenses have approximately $2 million, and the potential of incremental investment in product development and sales areas.

Our earnings target range is 6 to 8 cents per share.

We believe that DSOs will be in the range of 50 to 55 days.

We continue to expect that inventories will increase to about a million or so, based on our projected sales growth.

And finally we believe we can generate approximately $6.5 to $7 million in cash flow from operations.

Consistent with previous practice, we have provided guidance for current quarter only.

That said, we did want to share with you several modeling assumptions that may be useful when considering projected fiscal 2004 results.

If current market conditions persist, we believe the company can achieve sequential growth and both revenue and earnings for the balance of fiscal 2004.

We see gross margins remaining at current levels.

We expect operating expenses so increase modestly, reflecting higher levels of business activity.

That said we do expect to see improving plating he leverage, subject to continued top line growth.

Based on our existing investment policy and current market rates, we expect to earn between is 1.5% and 2% on invested cash and cash equivalents.

For tax purposes, we do not currently expect reinstatement of the U.S. federal tax provision until late fiscal 2004 public or early fiscal 2005.

Accordingly, we are not incurring these taxes for fiscal 2004's planning purposes.

Should this change, we will update in future earnings calls.

For current fiscal year, we expect tax expense to the in the range of 350,000 to 400,000 per quarter.

DSOs should remain in the current range of 50 to 55 days, and capital expenditures are expected to be approximately 4 million for the year.

Finally, as most of you are aware, we have an effective shelf registration to issue securities worth up to 125 million on file.

Our plan is to conduct a securities offering in the near future.

As you know, SEC regulations preclude any further comment on this matter at this time 378 with that, I will turn the call over to John Mack Adam.

Thanks Steve, and good afternoon, everyone.

I'll just take a few minutes to cover some of the highlights in fiscal year 2003, talk in more detail about Q4's results, and then comment on the current business climate of our outlook going forward.

The F5 team has a lot to be proud of with the progress we made in fiscal 2003.

With our Q4 performance, we delivered a fourth quarter of sequential growth.

We continued to increase our market share, and F5 now holds the number one position in the appliance market for layer 4 to layer 7 trafficking management.

We extended our penetration into the large enterprise customer base, and now enjoy the status of best spender in a number of very large enterprise accounts.

We also made great strides both in our partnership strategy both with Solution partnership with VI control and in a distribution network with large number of blue chip retailers now selling our product worldwide.

The channel root shows, which were carried over earlier in the year, resulted in our host of new resale of our product, and we are starting to see real leverage at these new retailers ramp up the F5 business.

The acquisition of the Euro (inaudible) SSL VPN technology is also to be very exciting.

This acquisition offers several key strategic advantages for us moving forward.

A catapult throat into a market that could be larger than a current traffic management market within a next few years.

We have already seen great enthusiasm from our channel partners for the (inaudible).

Another significant highlight of 2003 was our overall financial performance.

As Steve mentioned, all of our key financial metrics showed improvement during the year, including DSO reductions, cost generation growth and sales gross margins, with expenses under control.

Poor process of increasing profitability, and the last three quarters of consecutive growth moved well for fiscal 2004.

As far as Q4 was concerned, obviously I am extremely pleased with our performance.

All geographies met or exceeded our expectations.

In particular, North America and Japan showed great growth during the quarter, and the pipeline is strong as we moved into next year.

We have some very expensive sales in the quarter be with customers like Deutsch Telecom BAFX Airbus, cart gemini, Japan airlines, SAP, Mitsubishi, the Beijing Contrin brownal Highlight on the Over woods King woods Citigroup, eBay, say that American family, GE, General Motors, and a number of central projects.

Our software sales remained pretty mod nest the quarter.

The sales did increase sequentially quarter over quarter, and again we had some great enterprise when with some repeat business from existing relation with our customers.

As I mentioned in last quarter's call, one really positive side effect of the blade control initiative is the incremental business we are seeing from our partners, especially the several vendor as we see that the NHF of the entire range of traffic management products.

For example HP has now agreed to resell our entire product range, and we saw almost 500,000 worth of the revenue via this new agreement in the first 45 days since the agreement started.

We also had a first 1 million month of sales with Dell partnership, which included software, and standard product sales.

As far as the new SSL VPN is concerned, I was pleased with the run rate of approximately 500,000 sales in the quarter

More importantly the prospect pipeline and the request for evaluation are growing increase your market length, which again bodes well for future, results.

Our serious business continues to grow from strength to strength, with deferred revenue by a lot increasing once again in the quarter.

Overall, I feel very positive about the future prospects of the company as we move into fiscal year 2004.

Poor profit management business is growing nicely large enterprises continue to deploy of solutions which exploit the rich functionality of our product to reduce costs, and to improve availability and security of the business applications.

Steve has already indicated that we expect to deliver another quarter of sequential growth this quarter, and October is already showing continued strength in the overall booking rate.

Given the positive trends in our core business, the incremental opportunity with the SSL VPN, and the increasing leverage we're seeing from the channel and I Control solution partners, I believe we can look forward to quarterly sequential growth through the whole fiscal year 2004.

We will now pass the call over for Q&A.

At this time, if you would like to ask a question, please press "*1" your touch-tone phone.

Your name will be announced prior to asking your question.

Once again, that was "*1" at this time.

The first question comes from Troy Jensen.

Please state your company name.

Yes, it's ThinkEquity partners But first of all congrats on the next quarter, guys .A quick question I heard a few quarters go may be a year ago, you had talked about getting the software piece to 10 percent of revenues.

Is that still a goal for you guys, or does the acquisition of URoam dilute that a little bit?

I think it does.

And, we look at the pipeline for the uRoam, which is obviously an appliance sale.

I think that's going to be a material effect on the overall percentages, so we haven't actually given out a goal number for this year, but absolutely affects it, but from a positive viewpoint in that we see incremental business from the SSL VPN opportunity.

And I have got a quick one for Steve.

Could you tell us what the operating is, and may what revenue level you need to achieve that?

We haven't provided longer-term guidance at this point.

What we have said broadly, though is that overtime we will continue to see operating leverage as we reach thresholds of revenue going forward, and we will leave it to you guys to model that, but we think that there's clearly opportunities to increase operating leverage in the business battle.

Got it.

Well, congrats again, guys.

Your next question comes from Erik Suppiger, please state your company name.

Pacific Growth Equities.

Congratulations.

We have seen two of their acquisitions after the euro acquisition in the SSL space, Neuter, and safe web, do you think that's going to change your prospects in the market, given that both of them were by larger companies?

Yes.

This is Jeff.

I don't.

Actually, I think the market is really starting to take off for this type of product, and the real issue is, you know, who has real estate to land on in the network for these types of appliances, and the traffic management area is a prime place for this type of functionality to land, as well as the firewall space, as well.

But we see it as a net positive.

And if you would include that fact that we feel we've got a really great product in terms of feature functionality relative to those others, and also a good deal, I think it is definitely positive for the company.

When you say it's a net positive, is that because your peers have validated the market, or how is that a positive?

Yes.

I mean basically the market itself is taking off, is the point.

Okay.

And then Nortel also introduced a blade server device, more of a hardware device than yours.

Are you seeing evidence of that creating more competition on the blade server front?

Not really, at this point.

And that device itself, for redundance, is about $30,000.

It only runs in the IBM chassis, and so we really haven't seen it in any great volume in any sense of the last word.

In terms of the wear four to wear seven functionality, we do more functionality, given our software capability as we do in our BIG-IP product, so it's significantly less price, almost half, actually.

And your performance is at least as good?

Yes, absolutely.

Right.

Very good.

Congratulations once again.

The next question comes from Hory Mackalet (ph).

Please state your company name.

This is actually Matt Barzowskas.

Two questions, first on the Uroam, are you selling it through the same channels, the same partners actually selling it and the customer itself is at the same buyer, or is it a different buyer within the enterprise customer?

Good question.

First of all, a whole bunch of our existing partners have really showed a lot of enthusiasm to sell the product.

More than 50% of the existing channel will be selling the product.

We also actually are talking to some potential new partners because of the troys as well.

So, from that point of view its increment will keep the existing ones, and then new customers.

And the answer is yes and no in terms of the other buyers is the same, and in a lot of cases they are, and in other cases they can be different.

For example, the actual product itself can be very vertical solution oriented, in other words, you know, a few good, you know in an industry when you have a lot people outside the office, whether let's say the accounting practices, or auditors, or whatever, that's actually great solution sell there, because it's ideal for those types of people, so it can vary.

Mostly, it's the same.

Okay.

And I guess just a follow up.

What was the percentage of existing customers as a total percentage of revenue?

We didn't actually see that.

It's roughly about 40%.

Okay.

Thanks, guys.

Your next question comes from Sam Wilson.

Please state your company name.

JMP Securities.

Good afternoon, gentlemen.

A couple of questions.

First, John, you did get a chance, I would give you a soft ball here, but can you just talk about buffalo jump and yellow nights and kind of the upcoming product cycles you have?

I'll let Jeff to that.

He can get the softball.

Thank you John.

Yes, we have a new product cycle that comes up in 2004, right towards the middle of our fiscal year, and that is the buffalo jump platform, new hardware platform, much higher performance and new feature functionality as well.

That's going to be pretty exciting in terms of this SSL through layer 7 and layer 4 quarters of brand new high performance ASIC layer for ASIC in that device.

In addition, we'll be putting the FirePass product on that platform, as well, during that time period, and taking advantage of the hardware acceleration for SSL and other things to give it a performance increase, and then towards the end of the year we'll have a second software release for functionality, layer 47, as well as starting to roll out the application security gateway product.

Is everything on track with the road map you publish in the past?

Absolutely.

It's something you watch weekly, but we're meeting all the milestones to date, and pretty excited about the product.

We're also in fact show something customers -- as Jeff mentioned to me, what is exciting, if you look at the SSL performance, our target is to get between 8 and 10 times performance on the SSL transactions, and it looks like we're going to achieve that.

Terrific.

And then as a follow-up, can you talk a little bit about iControl.

It seems like you mentioned that as a percentage of revenue it's starting to show through as some as sales point through.

Are you gaining more attraction there, and what the feedback has been?

Yes.

We're definitely gaining attraction quarter over quarter and year over year.

We're up towards 35% of our deals are being pulled in through the relationships that we have with our iControl partners.

The two big ones to date are Microsoft and Oracle.

We spend a lot of time with their organization technically and in the field.

In the case Oracle, with Oracle consulting, so that we can become - as part of the solution to their large deployments and as and as you may remember, with Oracle a part of that unbreakable LINUX program and we support all the dog net capabilities with Microsoft, so we have 45 or so partners on board today.

Almost all the major enterprise software vendors, and, you know, we feel really good about the covering and the depth, especially in the key leaders, and we're working more diligently on the department in all depth in terms of all 45 in terms how people get with them.

The kind of deals it brings in tend to be very ingrained in the infrastructure of an enterprise and back end, because it's tied into the application.

It's a really good place to be.

They're typically larger projects.

And do you have a sense of the 45 how many are shopping iControl-enabled products?

Is it half or third, a few?

I probably say today it's around 48, to 50%, something like that with other development in the works.

And then Steve a couple of quick questions for you.

I notice the interest in net income flipped to the negative this quarter I was just wondering what was going there towards unusual make positive lately.

And of the charges you mentioned, which are one time, and which are kind of recurring.

I think the tax and the slight benefit are those the only one time portions for that?

Right.

In the other income one, couple of things going on, we had lots of since sale of our securities for the quarter and that had some negative foreign currency our translations adjustments still evaluated attributed to the negative.

Probably the wild card this thing is a little difficult to predict what foreign currency is glowing to do, but I would expect more normalized run rates on revenue probably in the range of 200,000 to 300,000.

Okay.

Again the wild card for same is foreign currency which is about total works that's going to be still keep

Is that anyone else and then on the charges you mentioned of which are one time, which are recurring?

Yes, we haven't have one time item that we mentioned with the benefit in G&A associated with the release of the reserve on the exodus becomes receivable as we settle that bankruptcy issue with regard to the expenses the ongoing amortization and tax charges will be ongoing charges

Okay, Terrific, and thank you.

Just quickly going back to the iControl thing it is an interesting statistics so the indirectly associated with iControl is our solution center.

Up about three quarters ago, beginning of this year, where partners, customers can where actually see solutions being implemented that is typically with an iControl element to them.

And weave seen the number of hits on that Web site go up dramatically.

To give you an idea, Quarter four we had over 500,000 hits on the solutions under the Web site 562,000.

In Q3 it was 121,000, and Q2, 55,000.

And so I really think iControl is a basis of

I mean, John, what do you think -- mine iControl has been around for two years, and it has been a fantastic strategy, thank you, Jeff, but what do you think is driving it recently?

I think the solution center helped dramatically, but as our solution partners are developing iControl solutions, and our customers, we have seen a lot of downloads by partners for the software development kit, just more and more in all system out there about how they can save the money by doing that in the existing networks.

We've also created a developers forum for the Web site for sharing of information, and code, and that has taken off very nicely, as well, so there is has been a community create aid round iControl now as well.

Terrific.

Thank you very much, gentlemen.

Your next question comes from Chris Sessing.

Please state your company name.

Crowell, Weedon & Co..

Got a few couple of questions for you guys.

Price-sensing revenue, do you give a percentage of sales

Software as a percentage of sales was 5%.

5 %.

Okay.

Looking at the -- at the federal market, I was wondering if you could quantify what percentage of your sales went into federal, and then maybe what type of federal FirePass opportunity there is.

Well, for the quarter, we estimate that our federal sales were about 12% of the total.

In terms of what the opportunities -- let me pass that on to Jeff for -

Yes, Thank you mark, we had a deal this past quarter in federal space on the civilian side, which was relatively large for FirePass, and there is a pipeline there.

In fact, one of the gentlemen who came over from uRoam in the sales side come us out of the federal business in general, and we see great opportunity there.

We also have just made some changes organizationally.

We promoted one of our guidance in selling to federal, he is now leading the business unit, and we're going to add more resources into the federal team, so that gives you a clue about how we see the opportunity.

Is there any additional restrictions dealing with the military would put on that product from a security standpoint?

When you say restrictions, you mean.

Well, for instance, any features are that they are looking at to maintain national security, whereas something that you don't have that you still have to develop?

Not currently.

Okay.

So you have all of the features are that they need?

Yes.

Okay.

What about the OEM opportunity for FirePass (Ph), or what you did with Dell and Nokia?

Yes, it's a possibility.

It's not going to be something that we talking tomorrow, and it's one of these decisions you made because it would take some resources to do it, but it would be pretty easy, because the FirePass runs on Intel and UNIX, but we haven't made the decision to do that?

Are you sort of de-emphasizing that the OEM relationships.

It seems like there was a lot of opportunity, their looking back two years ago or so, and I wonder if it's a strategy that you backed away from, or if you're still committed to it?

No, that's why I mentioned about a relationship with HP, which has broadened quite dramatically, in fact last quarter they were reselling our own products which isn't so much an OEM relationship as a reseller, but a very good reseller relationship.

The interesting thing about Dell is that we had an OEM relationship with them, but now we have a number of relationships.

One is where they just resell our standard product without a label on it, and that business is growing sequentially and every single quarter for the last year, and as I say about $1 million a month with Dell last quarter, but also like the OEM business where they take our software and put it on the standard Dell server, and then the software with Dell believes, as well.

So we see it not so much as an OEM relationship, but a business relationship overall with these several vendors we think we can increase.

With IBM for example, we had a very good relationship in Japan.

We sold over a million dollars in last fiscal years in Japan for us.

What is the service opportunity with the FirePass product?

Is it similar to what you have on the BIP?

Absolutely.

We see it as extremely similar.

Same sort of margins, and same sort of contract.

Thanks a lot, guys.

Your next question comes from Tim Luke.

Please state your company name.

Thanks.

I was wondering if you could perhaps just touch on the traction that you've seen in the area this quarter, and where you see some of the opportunities going forward, and then I was just separately wondering in you could just go back with respect to the other income lines, just give us a sense of how you see that going forward.

I think you mentioned how the range could be going forward.

overall, the tail force base was for third quarter and was about, was roughly about 18%, our business was in that space.

Of that, LINUX was pretty strong.

In fact that LINUX tends to be the area with Intel product we sale.

Ericsson has been a great partner for us.

We had a pretty sizable order actually at the beginning of the quarter with Ericsson.

And Nokia is now started to ship out products actually this quarter, as standard solution in their mobile wireless base stations.

And there is another partner that we're pretty strong up in the wireless area.

It has been pretty strong, actually.

on the other income line, do you have any current?

Yeah, on the other income line, we would expect a run rate in the range of 200,000 to 300,000 per quarter.

Could you give us an idea on the tax rate?

Should we be using around 30%

We don't see reinstatement of the federal tax provision likely in fiscal 2004 public so I think -- so what we're suggesting is no application or reinstatement of that for 2004.

We'll update on a call should that assumption change.

Frankly, in fiscal '05 beal (ph) see a Ryan err reinstatement of about a 35 percent tax rate.

We think the quarterly income tax will in the range of 350 to 400,000 per quarter this fiscal year.

Thank you very much.

Operator Your next question comes from Brent Bracelin.

Please state your company name.

Craft securities.

Thank you.

John, I want to follow up a little bit on the relationship that you have with some of these server vendors.

It sounds like there has been a change in at least kind of the last six months with now HP resells the products Dell reselling the product.

What is the long term opportunity with some of the serve everybody vendors, is therein taunt to strike relation ship with Sun and IBM, and what is driving the relationship between yourself and some of these server vend force

overall the basic solution within traffic something that we do link the application running on the server with the net network, so we see ourselves very much at an integration point between the network and the application, and we do a lot of optimization of course with server solutions, so that's very much in their idea of where they understand, applications like SAP, they understand, Oracle, Microsoft, and of course iControl.

They don't see us so much as a network vendor, but a solution vendor for their overall applications.

Reselling the switch is bigger -- you know, it is an opportunity that has been growing with Dell.

I do believe it will grow with HP.

We would like to extend the success we've understood Japan with IBM, and are looking to do that.

Steve, I had question on the product gross margins.

Looked like there was a slight down tech there, you know, still very high from a standpoint.

Is there any need to pay attention to kind of on the progress margin side.

Looks like that is that has been slightly down ticking the last couple of quarters.

Do you expect that to stabilize going forward?

And then the second question, while you're only giving kind of one quarter of guidance here is it kind of safe to assume you would have some kind of seasonal down tick from the December quarter, the March quarter, or do you care to kind of talk about that?

Yeah, regarding the gross margins, one of the changes that we had this quarter in the product gross margins was we had the $100,000 of amortization of acquired technology costs from the uRoam, aquisition some additional expense that's we saw on that line.

It's just amortization of a financial asset, so we thought we would characterize that as been non-operational.

And then to some degree the presenters there are just random lift lists in -- plus or minus a few percentage points in the margins just by various factors such as the precise sales mix for a given quarter, what is happening with pricing in the supply chain, so you know we do expect our margins to hold in the areas that we've had.

We will say some run and variation a little bit quarter to quarter, but I think as you've heard from the call, we believe that we're going to be able to stay in this general range that we've been in.

So I think that's looking pretty good.

URoam, I don't have a sense of if there would be a seasonal issue on the uRoam sales.

We're very early days, and it's just an up coming mix of market opportunity, so it isn't clear what the end lying seasonality would be if fin on.

The run rate for the business as a whole, we see sequential growth in the business as whole through next year.

Operator Your next question comes from Joanna Makris(ph) Please state your company name.

hi, good afternoon.

Wondering if you could comment a little bit more on your VAR expansion strategy, maybe in terms of fiscal gold bars you sign med the quarter, and level of interest from many of the VARs, and FirePass product?

Yeah, our VAR strategy starts at the beginning of this year.

We did some road shows, specifically in North America over the five or six cities, and we actually did a whole range on VARs, and I think the numb beneficial was between 30 and 40 that were Cisco gold resellers.

I think I said this in the last call.

We really didn't want to hire many more VARs, because it's actually quite a job to train these people, start doing business with them et cetera throughout the year.

So your question was about last quarter, we didn't have any focus on Pughny (ph) VARs last quarter, which was a focus on ramping them up.

And that has been very productive.

One of the checks we did recently in the last quarter coming towards the end of Q4, we took a cross section of very well qualified deals that we were working on, over 100 of them, and we looked at, you know, where these deals were generated from.

Did they come from the VARs, or generated by a sales force.

We found out that 30% were actually generated by the VAR channel, which we think is a very, very good metric, and ensures that we're getting some real productivity of the new VARs.

We also saw about 50% on average of the sales cycle to what was being done by these resellers, I'm take about VARS like Foresight, Dimension data, Continental resources, Mel stone systems, Future com, companies like that.

What was the second question?

Did you have a second question?

Oh!

FirePass.

Yes, so, a lot of the VARs, in fact a number of the VARs I just mentioned will be re-selling FirePass.

Our VARs in Japan are very excited.

We have a very strong partner strategy that is very excited about taking that product and selling it, and we're basically seeing that worldwide.

Thank you.

Once again, if you would like to ask a question at this time, please press "*1" on your touch-tone phone.

The next question is from Alex Henderson.

Please state your company name.

Smith Barney.

I've got a couple of questions for you.

One, can you talk a little built about what is going on with system pricing and component prices?

Yes, with regards to our pricing, it has remained very stable.

As you can see in our gross margins, and that has been true really over an extended period of time for us, and that seems to stay the same.

We have also seen stability in our supply chain component pricing, as well, but it's something we're going to keep an eye on going forward, but so far so good.

And on the Cisco VARs, it's clear that you added a considerable amount of capacity to your distribution earlier on the year.

It appears like that's ramping up.

Could you tell us a little bit about the rate of activity that you're seeing there.

Obviously that's a four to six-month sell cyclical, so I would think that you would still be in the early ties I phases of ramping that.

Yes, I think it will continue to ramp and we are still working on the best metrics we can get to measure, obviously top end revenues are the biggest one, I mean specifically from a leverage point of view, but I do believe that we'll continue to run.

At some juncture, will you come back into the market?

We have this slug of new players, we spent a lot of time and energy putting them together, training them, and we're still spending time on that.

Are you going to come back sometime during the next five to six months and do another part of the, that was, how do you view this program longer term?

We'll actually have more retailers which we set up, for this week or next week in fact, where we're going to do something very similar.

It's not to focus on new VARs.

It's focussed a lot on FirePass, and it's the same type of road show that will probably low will actually result in getting some new value added resellers bookies.

Not at immediate focus.

And then towards probably the beginning of the calendar year again, we'll look at doing the same thing?

So you are trying to pick up another 40,50, bad VARs in the first half of the next calendar year?

If you look target that was something like that.

Can you tell us a little bit about your sales cycle and deal size.

Are you seeing any acceleration in your self-cycle and are you seeing any increases in your deal prices?

It sounds like your deal sizes are gradually creeping up.

Gradually.

There are still (inaudible)150,000.

We see a lot of deals in the sort of 300,000 mark and so I think it's creeping up, but it's not dramatically what we are seeing, it's interesting, we did some statistics competing year-over-year, in terms of current spending income patterns, and we had 9 greater than $1 million sales, not -- I mean individual sales, versus 6 the previous year.

We had 46 sales of over 100 accounts that were giving us over 100,000 that were 22 the year before.

We are seeing things like that.-- penetration rather than deal sizes is more of our focus.

Right and in the sales cycle, any change in rate of business accepting these products?

Have we seen any change in tone there.?

Not significant change, no.

We have -- we've seen some wins where we weren't that much involved because of I Control with an Oracle control things.

When just recently we are inducting it, just came in, one came in from Oracle.

We see that.

Probably just see sales cycles to spare time.

I notice your deferred revenues were up 10% quarter to quarter, and equivalent of about $1.6 million or so, that's about 5% contribution of growth that is chewing up on the revenue line.

What's going on in that line?

Please.

Again, Alex, especially over the phenomenon we've been seeing over the last year or so period of time, we're seeing really good renewal rate on renewed maintenance term to enterprise customers, and we continue to see that, so it's really the renewal rates on our line service, to existing (inaudible) with three consecutive quarter of price revenues increase in revenue increase we have seen some increase from initial maintenance as well.

So, should anticipate that that will evolve through the service line in future quarters?

Yes, and we noticed deferred and amortized particularly over 12 months

One of the question on the uRoam, it seem likes you're seeing better channel acceptance than you may have anticipated coming in.

At this point, are you feeling like you're running a head of target on your guidance for that?

You had given some pretty exclusive guidance.

You feeling more confident on that guidance at this are time?

We're not baiting that one.

What I said in the quarter was that we should be over $1 million in this quarter coming forward, and we also said we should do we reckon we could do between $8 million and $12 million in the fiscal year, so I am sticking to that right now.

We are therefore seeing a lot of enthusiasm for the quarters.

Two additional questions either; quick the quick and easy head count?

Yes, 507.

And do you have a target head count for the December quarter?

I think it's likely that we're going to wind up in the 520 ranges.

We're going to make some fetch out John with refer to one areas you have understood wanted opportunities with several so selectively.

We'll probably make some selective head count increases in product development, as well.

So I would expect it to be in that range, and then opportunity as conditions exist that we can make further investments we'll consider them, but only in line of our top line and other financial performance.

Thank you.

The last question then I'll concede the floor The 100K amortization in gross margin sum.

Is that a continuing expense or a one-quarter phenomenon.

That's going to be continuing.

That's two months of amortization.

The run rate basis is going to be more like 150.

Okay Got it.

Thanks.

Your next question comes from Gabriel Lowy(ph).

Please state your company name.

Thank you.

Good afternoon, gentlemen.

Well done.

Would you care to comment at all on planned use of proceeds in this offering that you've mentioned earlier?

Gabriel, Well you know, as we said, you know, we are precluded by SEC regulations from really commenting on that any further than we have.

Thank you.

And I have one final question from Brent Bracelin.

Please state your company name.

Thank you.

Just to follow up on Nokia.

Given the fact that you mentioned they are actually now shipping the OEM product in some of their base stations, what is the ASP on that product?

How should we look at, you know, as Nokia starts to see some success on the infrastructure side?

How do we tie that in to the opportunity that you guys have there on Nokia?

Yes, it's actually not so much an OEM product.

I guess it depends on how you define it.

They basically take a standard IP product, and that's embedded in the overall solution.

So it's a hardware reseller type deal with us.

That's how that works.

And you know that will depend -- the sales on that will depend on how successful they are at selling their own solutions.

I said in the last call, and haven't really changed by view.

I think we reviewed Nokia as a very good partner, probably within the $3 million to $5 million annual range.

$5 million.

And you don't expect any -- you mentioned Ericsson contributed almost $1 million, or had a $1 million type deal in the quarter.

Are there opportunities for Nokia to generate those types of deal sizes for you, so or is it going to be traditionally in the 150K ranges?

No, I think I it's more likely to be closer to the Ericsson relationship, and some of those deals have ranged 300,000 upwards towards $1 million.

They are competing for the same business the wireless operators.

The solutions are going to be close.

Thank you.

Okay.

Well, there are no more questions, thank you very much, and we'll talk to you next quarter.

Thank you.