F5 Inc (FFIV) 2004 Q1 法說會逐字稿

Good afternoon and thank you all thank you all for holding.

I would like to welcome every one to the F5 first quarter financial results. [OPERATOR INSTRUCTIONS].

I'd now like to turn the call over to Mr. John Eldridge, director of investor relations.

Thank you, sir.

You may begin.

Thank you.

Welcome to our first quarter 2004 conference call.

The speakers on today's call are John McAdam, President and CEO, Steve Coburn, SVP of Finance and CFO, Jeff Pancottine, SVP of Marketing and Business Development, Jeff Stockdale, SVP of Product Development, Tom Hull, SVP of Worldwide Sales and Julian Eames, SVP of Business Operations and Global Services are also present and will be available to answer questions following our prepared comments.

Steve Coburn will begin today's call with a review of the financial results for the first quarter, and our current outlook for the second quarter of 2004.

John McAdam will review the company's operations during Q1, discuss F5's current business strategy, market position, recent customer wins and the general tone of F5's business.

We will then open the call for questions.

If you don't have a copy of our press release, it's available on our Web site www.f5.com.

In addition, an archived version of today's live Web cast will be accessible from our Web site through April 20th.

From 4:30 p.m. today until midnight pacific time January 23rd, you can also listen to a telephone replay at 800-876-5573, or 402-220-5329.

Pass code for the replay is the F5 earnings call.

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 SEC filings.

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

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

Thank you, John.

For the first quarter of fiscal 2004, F5's revenue and earnings exceeded the targets we set in our October 29th conference call.

Revenue of 36.1 million was above our guidance of 32- to 34- million.

Net income of 3.8 million or 11 cents per diluted share was also would above our guidance of 6- to 8- cents per share.

Quarter-over-quarter, we saw sequential revenue growth of 4.4 million or 14%.

North American sales were stronger than we had anticipated.

International also saw strong growth in AEMEA and Asia-Pacific.

North America accounted for 66% of revenue, international 34%.

System sales accounted for 71% of the total mix, with service and software accounting for 27% and 2%, respectively.

Lower software revenue reflects slow software sales and a shift for Dell from software OEM to reseller revenue.

Sales of FirePass were approximately 1.5 million, exceeding our Q1 target of $1 million.

During the quarter, we had one 10% distributor, Ingram Micro, which accounted for 18.7% of total revenue.

Moving down the income statement, gross margin came in at 77%, within our expected range.

Total operating expenses of 23.8 million were within our target range of 23.4- to 24.2- million.

Included in operating expense was 1.5 million of expense related to FirePass, representing an increase of approximately 400,000 from the previous quarter.

As a result of strong revenue growth during the quarter, our Q1 operating margin was 11%.

Up from 6% in the prior quarter.

Looking at the balance sheet, accounts receivable DSO ended the period at 44 days.

Better than the 55 days we reported last quarter, and below our 50- to 55-day target.

The change in DSO resulted from improved sales linearity and the continued success of our collections activity.

As we expected, inventories rose from 0.8 million in Q4 to 1.2 million in Q1, but remained low on a relative basis, with an annualized inventory turnover of 29-ton. 8.4 million in cash flow from operations exceeded our guidance and marked the 11th consecutive quarter of positive cash flow from operations.

Including 113.6 million in net proceeds from our recently completed public offering, cash and investments increased to 205 million at quarter-end.

Capital expenditures for the quarter were 750,000, and depreciation and amortization expense was 1.2 million.

We ended the quarter with approximately 525 full-time employees.

Moving on to the outlook, as we look ahead, we believe the growth that we've seen over the last four quarters will continue.

For the second quarter of fiscal 2004, we have set a revenue target range of 37- to 39- billion.

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

Operating expenses are currently targeted in a range of 24.5- to 25.5- million.

Our Q2 earnings target is 13- to 15- cents per share.

We estimate that DSOs will remain around 45 days.

We expect inventory levels to increase within a range of 1.5- to 2- million to support our continued sales growth.

We are currently forecasting 9- to 10- million in positive cash flow from operations.

With that, I will turn the call over to John McAdam, who will discuss key operational issues that contributed to our Q1 results and provide further details about our outlook for Q2.

Thanks Steve and good afternoon everyone.

Last quarter we indicated that the company was entering a true growth phase and the quarterly results definitely back up that belief.

Before commenting on our future outlook, I will give a brief overview of some key highlights of the quarter and also give you an update on our technology road map.

You have Steve's summary of the financial results.

I really believe these numbers speak for themselves.

Sequential revenue growth, strong margins, growing cash flow, reduction in DSO's, increased profitability, and operating leverage all point to very solid financial performance.

We saw strong demand for all the products in our application switch range and across all our main geographies of operation.

North America, Europe and APAC all delivered solid quarterly sequential growth.

Japan was down sequentially but that was expected, and we expect to see a strong performance from Japan in this quarter with the financial year-end for Japanese companies.

Our enterprise business continues to be very strong, and we had some great wins with companies like Bristol-Myers Squibb, New York Life, Comcast, MCI, UBS, EBay, Barkley's Capital, Liberty Mutual, DHL, Wells Fargo, GE, China Telecom, China Unicom, Vodafone, Overture, Microsoft and many others.

Our services business continues to be a significant contributor to both top line growth and profitability.

And given the increase in our deferred service revenue backlog, we expect that contribution to continue in the foreseeable future.

The new SSL VPN product sales were also very strong, contributing approximately 6% of product sales, and more importantly, the SSL VPN future sales pipeline has been growing consistently throughout the quarter.

Sales of our software blade controller software continue to be relatively low, but again, that was expected.

And we do not see any major growth in this area in the short term.

Nevertheless, our partnerships with the key server vendors, particularly Dell and HP, continue to progress, and we achieved record sales through the Dell channel this quarter.

Our technology road map is in great shape and we remain on track to introduce a powerful range of new products in the mid year time frame.

Known in generally as Buffalo Jump -- as the Buffalo Jump range of products, we believe these new products will further advance our leadership in traffic management and SSL processing.

As I have stated many times in previous calls, technology leadership continues to be one of our main goals as an organization.

As far as the future outlook is concerned, Steve has indicated our target range for sequential growth in this coming quarter with January sales orders already showing continued strength.

I believe there's a growth in our core business is evident that call for enterprises are becoming increasingly aware of the benefits of application traffic management, and they're deploying our products in increasing numbers to reduce cost and provide enhanced functionality, availability and security for the business applications.

We are seeing an increasing number of positive trends in our business.

With enterprise spending and traffic management increasing, the high interest levels in our SSL VPN solution plus the progress and the increasing leverage we see from our channel and iControl solution partners, I continue to believe that we can deliver quarterly sequential revenue growth and profitability for the remainder of fiscal year 2004.

I would like to take this opportunity to thank the entire F5 team for their efforts in Q1, and with that, we'll hand the call over for Q and A. Can we move the call over for Q and A, please?

Thank you. [OPERATOR INSTRUCTIONS] Our first question will come from Jason Ader.

Sir, your line is open.

Hello, good afternoon.

Nice quarter, guys.

I have two questions.

First, you guys talked about for fiscal 2004, your own guidance FirePass guidance being 8- to 12- million.

Are you going to modify that, and how much is taken into the guidance for the March quarter?

That's my first question.

OK.

Just on the first question, we're not going to modify that.

We've really only had one full quarter of experience so I think it wouldn't be wise for us to modify it now.

Obviously we did better than we thought we would do in the first quarter, so that's good.

In terms of this quarter, we expect to exceed 2 million.

OK.

And the second question relates to the traffic management market.

What do you think, John, is the growth rate, what do you think the growth rate of that market is?

I mean, it's been hard to put a finger on it, only because it's been flat for a long time in sort of a down tech-spending situation.

Now that tech spending is coming back, I mean, how do we look at growth rates there?

Do you have any kind of guidance for us?

Yeah, Jason, this is Jeff.

We've been looking a lot at that, and what we saw over the past few quarters is single digit growth.

We believe we'll have high single digit growth over the next year or two, and possibly moving into double digits thereafter is kind of what we're looking at the moment and our goal is, you know, from what we're seeing, that it will be about $800 million by 2006.

OK.

So, that would imply given your sort of trajectory that you're gaining market share as well?

Yes, and it happened, I think, we were the market share leader, gain leader over the last, what, five or six quarters, something like that, based on DELORO numbers.

OK.

So, the market's growing high single digits to double digits over the next few years and you're gaining shares, so you're growing, you know, obviously, solidly in double digits in that market, is that fair?

We believe we're the growth leader.

All right.

Thanks.

Thank you.

Our next question comes from Tim Luke.

Thank you.

First, congratulations on your very strong quarter.

I was wondering, as you move through the quarter, if you had any comment on the linearity in the business, and to what extent you felt that there was any sort of year-end budget flush and how you've seen the turn of the business as you move through the beginning of this year.

This is Steve.

Tim, with regard to linearity, we are seeing a change in the linearity of our bookings, our order flow.

You know, traditionally, we've run about 55% in the last quarter.

In the last month of the quarter, we are seeing that has come down shift down to principally the earlier part of the quarter, so we have seen a change in that, probably an improvement of about 10% point when we're looking at that last month of the quarter.

Budget flush, you know, that's a difficult thing to quantify on it.

I think we probably did benefit from some year-end spending on budget flush, unclear exactly to what the quantification of that is, but I think we did, in fact, see some of that.

Our best feel, and it's incredibly subjective, in terms of budget flush, maybe a million to $2 million.

OK.

And then the book-to-bill, do you have a comment on that?

Well, the only comment we have, the book-to-bill was greater than 1.

And could you just talk a little bit about the Wallace business and how that's developed through the quarter and perhaps how you've seen the competitive landscape shape up, particularly in Japan or the region things?

This is Jeff.

Wireless was very strong for us this quarter.

I believe it was somewhere north of 20%, which is up from the previous quarter in September.

We're seeing a lot of deployments out there for new applications for 2.5 and 3G around the world and continued to see strength across the regions in wireless, so as far as markets go, it's one of our top markets right now with finance being one of the others, and high-tech and government being the other two.

And then you asked about Japan.

I mean, the classic seasonality in Japan, we think it's going to be up a pretty strong quarter.

Actually this quarter in Japan with the financial year end as I mentioned, and a lot of that business has come from big partners, almost the who's who of the partners in Japan are partners with us.

In terms of mobile specifically, I don't have the exact numbers, but we could probably get that for you.

But it's fair to say that in general, you see yourselves taking share from some of the larger players in the market, is that right?

Yes, traffic management market, absolutely.

We've been doing that for a number of quarters.

And just to clarify, you said wireless was up 20% sequentially?

Wireless was over 20% for the quarter, and that's up sequentially from the previous quarter, where it was about 17.

All right.

Thank you very much.

Thank you.

Our next question comes from William Becklean of (inaudible) Company.

Oppenheimer.

Great quarter guys.

Could you comment a little bit on what you're doing right, what your competitors are doing wrong and who's out there, now that's giving you any concern?

Just generally, I honestly believe in traffic management specifically that our approach over the last four years, frankly, and in fact when the company was found which -- basically go at functionality from a software viewpoint, so our product is a software product that runs on commodity, Intel, obviously with some commodity ethics and some proprietary ethics, fundamentally from a functionality point of view soft software, and that's given us a major feature lead versus our competition.

We can introduce features more quickly and we have many more features.

I think that's been key.

I think our enterprise focus is on, and I can show what ever was done with big partners like Oracle and Microsoft, so I think generally enterprise is being improved and then clearly from the results from the Euro acquisition, we're doing extremely well with SSL VPN and we see a lot of synergies with the partners we have.

I think those are the main areas.

Sounds like enough.

Thank you.

Thank you.

Our next question will come from Troy Jensen.

Please state your company name.

Yes, it's ThinkEquity Partners.

Great quarter, guys.

I just have one question for Steve.

With the higher level of profitability, do you expect paying out a higher level of taxes any time sooner?

No, Troy, we don't.

We gave guidance on the last call that we didn't expect reinstatement of the tax provision until the first quarter of fiscal 2005, and I think that continues to be the case, so we don't expect reinstatement of the tax provision for this fiscal year.

Tax is a likely run sort of in the 400,000 range per quarter through the balance of the year.

And then in 2005, should we be modeling that 25% taxes?

Yes, I think we're going to be closer to 36, in the 36 range.

OK.

Great job, guys.

Thank you.

Our next question will come from Erik Suppiger.

Congratulations.

First of all, can you just discuss the competitive landscape for SSL?

Have you seen Net screen showing much more presence and do you see the market accelerating to the extent that your revenues are starting to take off there?

: Yes.

The market for SSL VPN now is hot.

I mean, many, many people around the world are evaluating these products because of the benefits of ease of manageability, cheaper cost, and more security at an application.

There's just no doubt about it, we see a lot of major enterprises doing this, especially folks, of course, with large remote work forces and sales forces and so on.

The competitive situation really hasn't changed a great deal from what we saw when we first got into the market.

It's Neo- terrorists and F5, that's what we've seen most of the time.

There are some other players out there, obviously, but we haven't seen it become extremely difficult in any sense of the word since Net-screen is there, but of course there are common channels and so forth between the companies.

But we have a lot of evaluations going on and a lot of people very, very interested in the project.

As John said, the pipeline is strong.

OK then Steve, you had mentioned you might see a 10% improvement in linearity.

Does that suggest that you might do a 40-41% in the third - 41% of revenues in the third month versus 51?

Is that what you were describing?

No I think from a base of 55.

So that would suggest that, you know, something more like 45% in the last month of the quarter.

OK then final question.

You talked about strength on the wireless side.

This morning, Foundry announced a win at NTT Docomo with its layer 4 through 7 switch.

Were you involved in the bidding process there or is there any competitive implication for you on that announcement?

Yes, we saw the announcement actually, and frankly we don't know about that piece of business.

We were going to (inaudible) in the middle of the night but decided not to do that and we've done extremely well in mobile in Japan.

We're doing extremely well with NTT Docomo and on the (inaudible) we are doing only a sales examination.

I just can't comment specifically on that deal.

OK.

Well, congratulations.

Thanks.

Thank you and our next question will come from Joanna Makris.

Announce your company name.

Hello, it's Adams, Harkness.

Two quick questions.

One, wondering what portion of revenues the federal business represented this quarter and how things are trending there, and then secondly, wanted to get an update on the timing of integrating the FirePass technology into the BIG-IP platform.

On federal, this is Tom Hull.

Last year it continues to be a very strong segment for us, and it's around 10% of the business.

We continue to invest in the federal market, we've added head count and see tremendous opportunities going forward.

I missed it, what was the second part of the question on the products?

Sure.

I just wanted to get an update on integrating the FirePass technology on to the BIG-IP platform.

OK.

Yes, this is Jeff Stockdale.

We've got plans to integrate the technologies.

We've been really focusing on increasing the performance and things through that integration, which is a product offering we'll be introducing later in the year.

Also we'll be putting the FirePass software on the Buffalo jump platform as well.

Thank you.

Thank you.

Our next question will come from John Quayle.

Please state your company name.

Yes, JMP Securities.

I was wondering if you guys could provide a little color on iControl pull through sales, and particularly have you been able to gain any more traction with that with some of the leading systems integrators?

Yes, we had a record quarter for iControl pull through this time.

Between the US and AEMEA right now getting the numbers, it was somewhere around 37% company wide, US and AEMEA leading, and that's up from about 33, 34%.

We had some very significant wins in the quarter with IBM Web-Sphere, Microsoft, Oracle, and, you know, that continues to be a major competitive advantage for us relative to anybody else in the marketplace.

And what was the second part?

Systems integrators.

Right.

We do have integrators on board and we've now put some more resources into lining up with the integrators and the app vendors at the same time creating sort of like a try triad, so we'll have a lot more to say about that during the year.

Jeff and Tom Hull got together and they thought it was a good idea to combine iControl focus resources with the integrator, because they tend to build practices around solution, so we think that's going to be good for us moving forward.

Great.

And could you provide a bit more color and also on the blade server market?

It still seems to be slow to ramping.

It is.

Yes, I mean.

Just whoever seeing, were just seeing extremely small.

I talked about sequential growth for the rest of this fiscal year.

That doesn't really depend on any material revenue coming from that area.

So we don't see any change in the short term.

Basically what we've been looking for and we've not seen it yet is mission critical applications on a number of blades in the maybe 4 to 6 to 8 blades, we're just not seeing much of that.

We're not giving up on it, we think we have a great value proposition, but it's a minimal business for us at the moment.

Great.

And could you provide any color on the plans for the cash now that you've been able to add that to your balance sheet?

Not specifically.

I mean, it was done for financial flexibility, and it's definitely given us that.

If we saw another potential acquisition like EROM will be definitely take a very, very close look at it, but there's nothing specific.

Thanks a lot.

Thank you.

Our next question will come from Matt Barzowskas.

Please state your company name.

First Albany.

Two quick questions.

First on the SSL VPN, the customer base, is it your existing customers that are buying products right now or did you pick up new customers?

And second, if you could talk about the shift from Dell going more to the hardware to the software?

That's it.

Sure.

On the SSL VPN, again, you know, our first target is initially going into our accounts, but again, we're also leveraging the channel in a very large way, and they're bringing us into new accounts that we're currently not in, so we think it's a win-win in that we're going to get business from our existing accounts, but obviously also from new accounts where we'll win the SSL VPN space but also bring us in on the big IP.

In terms of Dell, yes, we -- I mentioned in my summary at the beginning that this was actually our record quarter of sales orders through Dell.

What we're finding is that more and more, the Dell sales forces are re-selling our product with the BIG-IP branded name on it, which is really good.

And, you know, as far as we can see, that's going to continue to improve.

OK.

And just back to the SSL VPN, can you quantify of that 1.5 million, was it all existing customers or were there any new customers in there?

I would say it's probably a high percent of existing customer, probably over 60%, I would say.

There was a bunch of new customers as well, so I don't think we have the exact number.

OK.

That's a good idea.

Thanks, guys.

Thank you.

Our next question will come from Wayne DeMeester.

Wachovia Securities.

Hello guys.

I saw your -- you commented on your DSO's going from 55 to 44 and you're talking about a book-to-bill over 1.

Seems like and you predict for end of next quarter, the same level.

Those don't all sync.

Can you talk about the linearity about that?

All those numbers don't seem to add up.

This is Steve.

We've seen several quarters of improving DSO.

We'll see where we end up at the next quarter.

So these are just real conservative guidelines?

No, I'm not characterizing it as that.

And, you know, the change in linearity is a relatively new phenomenon for our business model, so we'll see where that trends going forward.

The second question is that you signed an agreement with IBM on your cross licensing of your intellectual property.

Can you talk a little bit about that, what that means going forward and how that develops?

Yes.

I mean, it's basically -- it was what the announcement said.

It was effectively a cross licensing agreement of (inaudible).

I think what it does really is apart from the obvious protection it gives both companies, it obviously does is it gives us the opportunity, I think, to forge better partnerships, and we'll obviously use that.

But it's really -- it's nothing more than what it actually says in the announcement.

OK.

Thank you.

And our next question will come from Alex Henderson.

Please state your company name.

Yes, Citigroup.

Hey, I got a couple of questions for you quickly.

Can you give us what the head count was at the end of the quarter?

It was 525 full-time employees.

What was it last quarter for--?

I somehow missed that in my database.

507, I believe.

And what was the actual ending share count?

Let's see.

We ended up with -- on a fully diluted basis of -- ending share count was 32 --33 million after the offering.

33 million.

Yes.

Couple of more business-oriented questions.

Can you talk a little bit about what pricing conditions looks like in the various product areas and also simultaneously what component prices are doing on a relative basis?

Are you seeing any variance in the direction of those?

In terms of AFP and discounting, we haven't seen any significant change at all.

It's been incredibly steady for a whole range of quarters.

Component pricing has got off a little bit.

Memory has probably been the main area.

Component price was up a hair?

Yes.

And what about on the competitive front, any comments about competitive activity on either Nortel or Cisco front?

Again, it's not changed much.

I mean, we really feel very, very good from a competitive position.

Obviously still Cisco is the key competitor because of their current presence, but in terms of product range, we feel really, really good about where we sit.

Do you see any evidence of a new product or anything coming down the pipe that could change the balance at all?

Haven't seen it.

Nortel just released new product late last year, so -

That was late summer, if I remember correctly.

Right.

But that's -- you know, their cycle has been more like an 18-month cycle.

So I don't perceive that we'll see anything from them real soon.

All right.

So really mundane environment in terms of competitive action.

What about new companies like Netscape and the like that are coming up from the smaller side, do you see any issues on that front or any concerns?

Not really.

No, not really, seen one or two deals but, not many.

We see them very rarely, and only in certain spots where they hire a sales rep here or there, but very rarely.

I mean, the fascinating statistic is that when we look at the number of things we see various competitors, we've seen that as a percentage of fiscal drop somewhat, it was way up in the high 80's and it's gone down a little bit, but then when you go beyond that, it's less than 10% of the time for any other including Nortel, any other competitor.

Wow.

On the channel side, Cisco VAR channel ads in Q1 on track to bring some additional gold/silver guys on board here?

That's a good point.

Actually the (inaudible) partners into a goal partners, say that's our highest level of partnership, we added 10 last quarter, I didn't say that in the call, probably should have.

So we added 10 last quarter, and obviously we'll keep looking at potential future partners.

And on the application security market, you know, we talk a lot about load balancing here and things of that sort, but the applications security market seems to be a pretty hot subject.

Can you talk a little bit about what you're getting you know what kind of comments you're getting back from the enterprises in terms of how they're viewing security and specifically the ability to integrate the applications back in?

Yes, that's a very hot issue right now with most large enterprises at the application security level relative to the network security level.

We've been on the road for about six -- over six months now visiting with existing customers, prospects, partners, doing a really thorough job of honing in on exactly what needs to be there, and all of that information is going into our development strategy for the application security gateway as we've mentioned before, which would come out by the end of the year, the end of the calendar year, so it is becoming a very big issue.

A lot of people want to see that activity along with the traffic management consolidated into one place as opposed to having many different little boxes running around, and so it helps -- it leans right into our strategy of taking advantage of our real estate in the enterprise.

One last question that I can't resist asking this.

I'm a little surprised at your comment on the book-to-bill.

The last five times somebody's asked the book-to-bill number on a call, you've said, well, we always run a 1.0 book-to-bill and now you're running a book-to-bill over 1 and you blew the numbers out.

You got better linearity.

Did you alter the pattern of shipping to order at the very end of the quarter here to end up with a positive book-to-bill?

Because that's not been your policy in the past.

So I'm a little -- I was a little surprised to hear you change your comment there.

We are actually -- we weren't asked last quarter on book-to-bill, and in fact, we did have a book-to-bill of more than 1 last quarter as well, so that's been a couple of quarters.

And we've seen some improved linearity, you know, and obviously a more optimistic change in the business.

So are you going in fact allow yourself run positive book-to-bills in the future or are you still hitting pretty quick shipments out?

That does strike me a little bit of a change in your shift to order, in day shipment kind of policy.

We don't have a specific policy as such to have a book-to-bill of 1, so in terms of the future, we'll see what happens.

OK.

Thank you.

Thank you and our next question will come from Denise Fiallo.

Hello, yes from Merrill Lynch.

Two quick questions, guys.

First is on sales and marketing expense as a percentage of revenues, we've seen that number come down nicely and I'm wondering if you can elaborate a bit as to what cuts have been made and where else do you see possible improvements.

My second question relates to actually the share count.

I understand that there is a lockup period that is about to expire.

If you can provide any clarity as to what will be happening over the next couple of weeks.

Thank you.

OK.

Steve, do you want to do the first one?

Yes, with regard to the operating margin question, we did see some improvement in our sales/marketing as a percent of sales.

We came down from 44% in the previous quarter to 41% in the current quarter, and that was really the area that we've been targeting to see improved operating leverage this year.

And we've spoken about that in the past.

I think our hope and expectation is that we'll continue to see improvement as we look out across the year.

Looking at some of the other elements of operating expenses, you know, we've been running 15% to 18% in spend of revenue in terms of development.

It is likely we're going to stay sort of in that range, going forward, and I think there's some possibility of some incremental, small incremental gains in G&A as a percentage of revenue as well.

OK.

Let me just comment on the lockup period.

Just to recap, we did the secondary offering, and that was priced November 11th, and all the F5 executive officers and members of the board entered the lockup agreement with the underwriters effective as of that date.

The underwriters waived the lockup as of January 6 this year for officers selling under the 10B51 plan.

Our policy is that all the F5 execs are allowed to sell F5 stock only under a 10B51 plan.

In fact, F5 has further taken a pretty conservative position of not allowing 10B51 sales during the first month of any fiscal quarter, which is the month in which we announce the results of our previous quarter.

So it's all execs are in 10B51.

So consequently, the 10B51 plans for only that will be reinstated on February 1st.

And given that these plans are automatic, remember, in nature, you should expect some incentive selling to occur then.

And the lockup for expires for all the external directors on February 9th.

So if I'm understanding that correctly then, there could be, as of February 9th, you know, a significant amount of shares out in the market, or is there a way to quantify that?

Is that available?

No, I don't -- no, I'm talking about lockup for execs and for board members.

OK.

And that's about, from what I recall, between 10 to 15% of overall shares out standing?

No, Oh, goodness.

Let me get back to you on that.

But I'm talking about exercising options.

OK.

Am I misunderstanding the question?

Well, based on my understanding, I'm referring only to options, not stock that management holds today.

Stock options is what I was referring to.

OK.

Thanks for the clarification.

OK.

Yes.

Thank you.

Our next question will come from George Lunev?

Correct.

Thank you.

Good quarter, gentlemen.

I got a three-part question here.

On your business operations, do you have and what types do you have plans to reduce operating some expenses, and increasing efficiency of the employees, and just reducing waste?

And then also you mentioned SDO's I never heard that term before, if you could define it and what percentage it was.

On the first question, obviously we'll always continue to look at optimizing operating expense.

We're not going to be doing that in the short term because the business is growing and we expect it to continue growing, so we will be growing expenses but not as fast as revenue, so you will see operating leverage increase.

Add the biggest way we do that here is channel leverage.

That's our biggest focus.

I didn't catch the second question.

SDO's, you mentioned that acronym.

Are you talking about DSO's?

I'm sorry, DSO's, yes.

DSO's stand for Day Sale Outstanding and it is really a measurement of how many day sales you have in your accounts receivable.

Very common metric used to determine the age of your receivables.

OK.

Thank you.

Thank you.

Our next question will come from David Escanazi.

Please state your company name.

I'm an investor.

Great quarter, guys.

Actually, John, I think you answered my question earlier, and it had to do with what you're going to do with all that cash.

Assuming you're not going to send me a dividend any time soon, and you avoided the question a little bit, I think I'll ask it again, though.

Obviously you made the one acquisition, and you mentioned that, you know, that could happen again depending on the kind of company.

What would you be looking for and what kind of strategic company would you be looking to match up with F5 if one came along?

OK First of all I'm smiling as I say this, David -

Me too.

I didn't avoid the question.

Just to be more specific then, the areas that we're interested in terms of if there's going to be a potential acquisition would be a technology acquisition most likely.

You know, UROM was a classic example.

We'd be looking for something that would be part of the road map that we're looking at that would be very synergistic with our channel and our sales force and would get us to would be pretty profitable actually in a short number of quarters, so synergistic from a financial point of view.

You know, looking out, obviously application securities are an area that we're really interested in.

That might be something potential.

But as I say, nothing is specific right now.

All right.

Thanks a lot.

Great quarter.

Thanks.

Thank you.

Our next question will come from Brent Bracelin.

Please announce your company name.

Pacific Crest Securities.

Thank you.

I guess I had a follow-up question on kind of the wireless mix.

Now that it's 20% of the business, what is your visibility into that segment going forward?

Is that business historically been relatively lumpy, and the momentum you're seeing now, do you think that's sustainable in the foreseeable future, I guess question one.

Question two, can we get a status on Buffalo jump, are those products still on track?

And third and last question has to do with based on your goal of improving operating leverage in the model this year, could you kind of go over what your kind of long-term target operating model goals are for the company as well?

Thanks.

This is Jeff.

I'll take the first two.

So basically on wireless, you know, it's been an increasing percentage of our business over the last few quarters.

It's been very strong.

A lot of that is tied to the rollouts of 2.5G and 3G services going on around the world.

As an example Ericsson is a large re-seller of our products.

They bundle our products in the packages that they sell to wireless operators for things such as MMS services and so on.

And the more deployments of that there are around the world, obviously the more systems we can ship to Ericsson and Nokia and some others.

And then, of course, we sell directly to some of the carriers themselves.

So it's been relatively strong, and we play a key role, we play an integration role between the voice network and the services that run on the servers in the IP network.

So as you get a stock quote, you're going back over the network into the IP network and gaining access to some data.

So we believe that will continue.

We've gotten some 3G wins like in Japan with the Fomaphones for doing SSL encryption, decryption, and we believe those things will continue over time.

Would you say your visibility into wireless is better than the corporate side or is it essentially the same?

I'd say it's pretty similar.

I don't think -- don't think it's any better.

And then on the Buffalo jump products, they're on track.

And Jeff, I don't know if you want to comment.

Yes, we're on track for product delivery by middle of the year and we should be entering our beta test phase towards the end of the quarter.

The last question was -- I forgot.

Your target-operating model for Steve.

Yes, you know, we haven't -- the comments that we've made around long-term operating model is that we believe given the nature of our business model, it's a hybrid model between software and hardware company, we believe long term that we can get, you know, an operating percentage, income percentage that would be in the 20%-plus range over time.

Now, you know, how long will it take to get there?

Unclear.

Will we hit that kind of a target this year?

I'm not sure that's going to happen, but I think we certainly are going to make some progress.

Towards that is as our revenues increase and we continue to have success in getting operating leverage out of our channel model.

Great.

Thanks a lot.

Thank you and our next question will come from Mark Sou (ph).

Hello, this is Brian for Mark.

You mentioned that your services backlog was strong.

Was that because of your unseasonality or was it due to a proportional increase in product revenues?

You know, we did make a comment -- oh, I'm sorry.

Yes, I did.

Yes I think there are two factors there have been improving that, and then let me pass it on to Julian Eames who runs that part of our business.

I think we've been seeing continued success from renewals of existing customers on follow-on service, and then obviously we've seen over recent quarters real growth and our initial product sales that brings service along with it.

Just to add to that, in North America particularly, we get every piece of renewal business that we can, nearly up to the 100% mark, and we've seen growth in some of the other regions that before had lagged behind, so Japan and America particularly have grown quickly and we're starting to see that in APAC as well.

Thanks.

Great quarter, guys.

Thank you.

Our next question will come from Chris Sessing.

Please state your company name.

Crowell, Weedon & Co. I was wondering if you could update us as to the number of VARs that you've signed on for FirePass, as well as what type of overlap you're seeing with your traditional layer 4 through 7 VARs.

Yes, again, our initial efforts with FirePass this last quarter were really focused on getting our channels up to speed.

We had a channel road show, and really we're focused on driving our current channels.

We have signed several security VARs, but initially the focus has been getting our channels up to speed.

They're very excited about the product and are out working it aggressively.

Just remember that, you know, over half of our existing VARs for traffic management are cell security product.

What is your current number?

In terms of SSL VPN, it's going to be more than50.

Well, no, what is your existing product base reseller account?

The number of VARs?

We have about 100 in the gold range.

The total number -- I'm hesitating cause I don't actually know that, but in terms of our top tier range, we have about 100.

That's in North America.

And then, of course, we've got global value added resellers like Siemens and Companies like Cap Gemini and IBM and Hewlett Packard and Companies like that.

OK.

So the goal is to get the FirePass in with all of your gold VARs?

Well, the ones that sells security.

And that's about half of them.

And it's just like over 200 VARs, is the number in total.

OK.

And then looking at the SSL VPN market, what are the primary feature that is your customers are asking for?

Well, basically, I mean, they're looking for the SSL VPN remote access, right?

There are some people who are looking at the remote desktop access as well, and the reverse proxy capabilities.

Obviously there are lots of different bells and whistles depending on specifically what they're trying to do.

And what they're really looking for is to save a large amount of money in the management and operations of the remote access capabilities over an IP VPN.

When they're evaluating your product versus a competitors, is it coming down to price, number of users supported, throughput?

What are the key features there is?

Typically when people put it through its paces, it's does it work with my applications and is the performance and reliability meeting my needs.

When you say with my application, it could be an SAP application behind it, it could be a custom application behind it.

It depends on the environment that it is going into.

They want to make sure the integration works well.

Thanks a lot.

I show our final question from Jason Ader.

Please state your company name.

You guys actually answered it.

Thanks a lot.

OK.

We'll take one more question and then we will quit.

I show no further questions.

OK.

As there are no further questions, thanks very much and we'll talk to you next quarter.

Thank you.