F5 Inc (FFIV) 2004 Q3 法說會逐字稿

Welcome to F5 third quarter 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 now like to turn the call over to Mr. John Eldridge Director of Investor Relations.

Thank you sir, you may begin.

Thank you Sarah.

Welcome to our third quarter 2004 conference call.

The speakers on today's call are John McAdam, President and CEO;

Steve Coburn, Senior Vice-President of Finance and Chief Financial Officer and Dan Matte, Senior Vice-President in Marketing.

Jeff Pancottine, Senior Vice President and General Manager of our Security Business Unit, and Tom Hull, Vice-president of Worldwide Sales 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 results for the third quarter and our current outlook for the fourth quarter of fiscal 2004.

Next Dan will provide an update on the upcoming launch our new product family.

Finally John McAdam will review the Company's corporations during Q3 and discuss our current business strategy, market position, recent customer wins and the general tone of F5's business.

We will then open the call up for questions.

If if you don't have a copy of today's release, it is available on our website www.f5.com.

In addition an archived version of today's live webcast will be accessible from our Event Calendar page on the website through October 26 from 4:30 p.m. today until Midnight Pacific Time July 23.

You can also listen to a telephone replay at 800-925-2357, or 402-220-4100.

Pass code for the replay is F5 earnings call.

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

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 findings.

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

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

Thank you, John.

In the third quarter of fiscal 2004, we continued to see solid revenue growth and improved operating leverage.

Revenue of 44.2 million was above our guidance of 42 to 44 million and represented an increase increase of 52% year-over-year.

Net income was 7.4 million or 20 cents per diluted share was also above the guidance of 16 to 18 cents per share provided on our June 2 following our acquisition of MagniFire.

This compares to 1.4 million or 5 cents per diluted share in the third quarter of fiscal 2003.

Quarter over quarter revenue grew 3.6 million or 9% sequentially.

As anticipated the geographic mix of sales during the quarter returned to historical levels with North American revenue representing 63% of overall revenue and International accounting for 37%.

Product revenue was 74% of the total mix.

With service accounting for 26%, comparable to prior quarters.

Revenue from FirePass totalled approximately 3.8 million compared to 2.7 million in Q2, and the 3.5 million target we set for Q3.

We had no recognized revenue from sales of TrafficShield the applications security product we acquired with the purchase of MagniFire on May 31st.

During the quarter with had 1 greater than 10% distributor [IngramMicro] at 19.9% of total revenue.

Moving down the income statement, gross margin came in at 77.2%, better than our 76% to 77% target.

Total operating expenses including approximately $0.5 million of MagniFire related expenses were 27.2 million, within our post acquisition target range of 26.5 to 27.5 million.

Our Q2 operating margin of 16%, up from 14% in the prior quarter, reflected further improvement in operating leverage.

Looking at the balance sheet, accounts receivable DSO for the quarter was 40 days versus 42 days last quarter, and at the low end of our guided range.

At 1.9 million, inventory levels were flat with the prior quarter, reflecting annualized inventory turnover of approximately 22 times.

10.6 million in cash flow from operations exceeded our guidance, marking the 13 consecutive quarter of positive cashflow from operations.

Following 26.9 million in cash payments related to the purchase of MagniFire, cash and investments were at 210 million on June 30, compared to the 227 million last quarter.

Capital expenditure for the quarter were 2.6 million, and depreciation and amortization expense was 1.2 million.

Including the 23 employees who joined the company with the MagniFire acquisition, we ended the quarter with approximately 590 full-time employees.

Moving on to the outlook.

On our Q2 conference call, we indicated the likelihood that we would reverse the valuation allowance on our deferred tax assets and begin recording income tax expense in the first quarter of fiscal 2005.

And possibly as early as in the fourth quarter of fiscal 2004.

As a result of the Company's strong performance during the past 3 quarters, we have determined that it's appropriate to reverse the allowance in the current quarter ending September 30.

Since this decision will have a significant positive impact on net income for Q4, I will first discuss our outlook for the quarter without the impact of the expected tax changes.

Then I will Provide guidance that reflects the income tax changes for the quarter, and discuss our expected tax rate for fiscal 2005.

For the fourth quarter of fiscal 2004, we anticipate revenues in a range of 45 to 47 million.

As previously discussed we do not expect any material revenue from Traffic Shield in Q4.

Our expected gross margins - - we expect gross margins to remain at current levels within a range of 76% to 77%.

Operating expenses are expected to be in a range of 27.5 to 28.8 million.

EPS calculated in a manner consistent with prior quarters and before the effect of the tax adjustment is expected to be 20 to 22 cents per share.

This include an estimated 4 cents of earnings dilution from the MagniFireer acquisition.

We estimate that DSOs will remain in the low-to-mid 40-day level.

Inventory is expected to be approximately 2.5 million.

We expect to exceed 10 million in positive cash flow from operations.

As a result of our decision to reverse the valuation allowance on our deferred tax assets in Q4, we will incur a 1-time benefit of approximately $7 million.

This will be offset be income tax expense estimated to be in a range of 900,000 to 1.3 million.

Resulting in a net benefit of 5.7 to 6.1 million.

With this adjustment, we anticipate that our Q4 earnings will in a range of 37 to 39 cents per share.

Going forward, we expect to record income tax expense at an effective rate of approximately 37%, in 2005.

As a result of our net operating loss carry forwards however, we do not expect to pay income taxes on a cash basis at least through fiscal 2005.

With that, I will turn the call over to Dan Matte who will provide an overview of our upcoming new product release.

Thank you Steven.

As most of you know, we're rapidly approaching the launch of our new product family code named Buffalo Jump.

This new architecture which includes both hardware and software upgrades off our core products represents the next generation in application traffic management capabilities from F5.

Be believe the design represents the most flexible and cohesive approach to successfully deliver business critical applications in a secure and optimized fashion to any user anywhere.

And will be unmatched by anything in the industry today.

In addition to many advances in functionality, we expect to deliver industry leading performance and areas such as SSL.

Where we'll increase performance 10 fold over our current levels.

We are on-track to deliver Buffalo Jump in the first half of September 2004.

We have had the new products with BIG-IP Version 9 as Buffalo Jump software will be known the market in beta and most recently as part of an early access program.

Feedback from customers has generally been extremely positive.

They have cited optimization techniques to reduce bandwidth consumption and speed the delivery of applications;

SSL performance and advanced security and traffic management capabilities as some of the reasons they are excited about this release.

These early installations have already resulted in Bid-IP displacing competitive offering based on F5's execution in delivering these advanced functions in a way that is easy to use.

Version 9 also gives our customers the ability to reap the benefits of application traffic management in parts of their network architecture that was not previously possible.

The new hardware family, which will include a range of products similar to our current line of BIG-IP application switches will Incorporate many new features including: the next generation of our "Packet Velocity" ASIC for advanced performance and many design changes for enhanced useability.

There are many more features and capabilities that we will reveal as part of our product launch process.

We believe this release is strategic for F5 not only because of the foundation it provides for the BIG-IP family of products moving forward, but also for the ability it gives F5 to rapidly incorporate new functions to address changing customer needs.

F5 expects to leverage the architecture underlying version 9 and use it to benefit our other products such as TrafficShield for application level security and FirePass for secure remote access.

We believe that our customers and prospects are looking for a better way for their application network and security groups to collaborate and address the issues that enterprises are facing today.

Version 9 from F5 provides us with a platform to consolidate many functions on the network, delivers a more efficient way for those groups to collaborate, reduces management complexity and improves the security of applications.

We expect that our open standards based iControl interface will continue to play an important role in allowing customers to create application aware networks.

Recent examples of this include integration with Microsoft Operations Manager 2005 as part of their Dynamic Systems initiative in Oracle's Application Server 10G.

To put this in perspective, we feel that the new functions such compression, server offloading techniques, simplified user interface, the new "Packet Velocity" ASIC and advanced traffic management capabilities delivered by a trusted source like F5 will make Version 9 the only logical choice for customers' application traffic management needs.

I'll now hand you over to John McAdam for a review of our Q3 results.

Thanks Dan and good afternoon.

Q3 was another solid quarter. 9% sequential revenue growth, 52% year-over-year growth and strong product and services margins continued our progress in improving over all the operating margins up once again to 16%.

From a geographic viewpoint, North America had a very strong quarter, with sales to large enterprise accounts.

Europe was also very solid, and Asia Pacific once more returned another good quarter with most both regions showing continued sequential growth.

Our U.S.

Federal business was down sequentially, but we expect to see that business improve in this current quarter.

As we come up to a financial year end with the Federal budget cycle.

Similarly and as we expected our Japan was down sequentially in Q3.

But again we expect to see improvement as we enter the half year financial cycle in Japan.

Some examples of large wins last quarter includes: Wells Fargo, eBay, Commerce Bank, Deutsche Force, Abbas, Citigroup, GE, Virgin Mobile, [Wowee] Standard Bank, [TOM.com], Deutsche Telecom and several Federal contracts.

Our service business goes from strength to strength both in terms of topline revenue growth and profitability.

The continuing sequential growth in the third revenue backlog bodes well for future quarters.

As Steve mentioned our FirePass business was slightly above our target in Q3.

We had some pretty good wins with FirePass.

A noticeable win was NTT Communications where we won a contract to provided FirePass for the new SSL VPN service offering.

The new service available through NTT Communications open computer network business pack enables subscribers to gain secure mobile access to applications and data using standard web browser technology, regardless of the environment.

We expect to continue improvements with FirePass this quarter.

And have a target revenue goal of approximately 4.5 million.

If we achieve this, we'd be slightly above the top end of our target range that we set for fiscal 2004.

The transition plan for the MagniFire acquisition is very much on track.

As we mentioned on our conference call in early June, we do not anticipate the TrafficShield product to be a significant rearview mirror contributor in this quarter.

As we mentioned on our conference call in early June, we do not expect the TrafficShield product to be a significant revenue contributor in this current quarter.

We expect to ship limited product towards the end of the quarter, and then start to ramp up revenue shipments when we move into fiscal 2005.

I remain convinced that the MagniFire acquisition will prove to be a very positive contributor to our strategy, and will provide F5 with a major differentiator in applications security.

Especially when we move toward an integrated solution with Version 9 of BIG-IP and TrafficShield.

You have done summary of the Buffalo Jump products in Version 9 of our new software.

We believe that these new platforms will position F5 very strongly and enhance our leadership position in applications traffic management.

These new products combined with the application securities products of FirePass and TrafficShield, as well as the progress we have made with our distribution channel and solutions partners driven by iControl all point to continued sequential growth for this quarter and a strong central 2005 as we move into a year with a host of new products and solutions.

Once again, I want to take this opportunity to thank the entire F5 team for delivering a great quarter.

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

Q&A, please?

Yes, your first question comes from Eric Suppiger.

Your line is open and please state your company name.

Pacific Growth Equities.

Can you hear me okay?

Yep.

Congratulations on a good quarter.

Thank you.

Say, FirePass, I think in the March quarter, it grew by a little over 1 million, this quarter, it grew by 1 million, and then you're projecting that to decelerate to less than that in the June quarter.

Why do you think you're seeing a deceleration on that product line?

As I say, the range is approximately 4.5 million for the target.

We're seeing the business growing, we're seeing the pipeline growing, but that's the best guess we've got right now.

Okay.

Japan, can you give us any color?

That was clearly a big driver last quarter.

Can you give us any sense for maybe as a percentage of revenue?

You've guided it in the mid 10%-20% range.

Can you give us a feel for where it came out?

Yes, basically it's in the 10% to 20% range, and it's unlike last quarter where it was at the higher end of that, it's at the lower end of it.

Okay and with the September quarter with Buffalo Jump coming in the last half of September, would you anticipate a back end loaded quarter?

I think we're going to see bookings on the ISP very similar to what we've seen in previous quarters.

So I don't think we're going to see a substantial change, if any, in terms of the actual bookings or activity that we normally see.

How was it this quarter?

About 50% in the last month.

Okay.

So that's what you would anticipate in September as well?

I think on the previous call, that's what we expected.

Okay.

Can you just comment, the NTT deal with the FirePass, do you think - - can you give us any sense for how that might ramp in the September quarter?

Not really, not yet, Tom.

It will be slow.

Again, it's a large opportunity, but it's going to take a while to ramp.

And so again we're looking at it for the long term out through next year.

All right, last question and I'll pass it on.

Can you just comment right now in terms of the executive management at F5?

Are are there any openings or positions that you're looking to fill?

Okay.

That was a pretty vague question, Eric.

I may as well answer it, because I think I know what the question meant.

I know there have been some rumors.

We've made an offer to a candidate to fill the Senior Vice-president of Product Development and the CEO position, it's one and the same position.

The offer has been accepted.

The person has not actually physically joined us yet.

When that happens, and we expect that be to pretty soon, we'll send out a formal press release.

Very good.

Thanks and congratulations.

Thank you.

If you would like to ask your question, you can press star 1 on your touch-tone phone to ask a question.

Your next question comes from Denise Fiallo.

Please state your company name.

Hi, yes, Merrill Lynch.

Good afternoon.

My question is with regard to the VPN product and the overall market.

To put it in context from us, there's been a lot of numbers floating around from different research form are first quarters as to how big the opportunity is.

How big to do you see the SSL VPN market for '04 and '05?

And obviously the positioning of FirePass in that number?

Right.

The numbers out there today are from Infonetics and they're probably the ones that follow it the closest today.

They're talking about the market being upwards of 600 million by 2007.

And I would say it's probably somewhere around the 150 million range in the coming year here, at this point.

Now, FirePass, you know, obviously, this is our third quarter of shipment.

And the Infonetics numbers that came out, we were second behind Juniper, who had been shipping for quite a while.

So we've gone from 0 to second place within 3 quarters.

Okay.

So if I take that - - well, let's say 150 number and divide it by 4, yeah, there seems to be a very wide gap.

How do you see that closing in over the next few quarters?

Well, I think it's growing very quickly.

We so a lot of pipeline.

We see a lot of enterprise customers out there evaluating SSL VPN.

We see a lot of service providers as we did with NTT here looking to use it as a technology to provide remote access to customers.

So there's a ton of activity in the market at the moment.

Okay.

Second question, one of the - - in one of the investor conferences earlier this week, one of the networking providers, networking vendors, I should say had mentioned their interest in acquiring a lair 4-7 company, so the hardball question is how do you guys feel about either partnering up or otherwise with another company to sort of broaden your reach, particularly in the security business?

Yeah, I'm not quite sure exactly what you're talking about.

If you are talking about potential acquisition type discussions, we would never talk about that in a conference call.

Or would you consider some type of joint venture agreement for distribution?

It is not something we're considering right now.

Okay.

Fair enough.

Nice quarter, guys.

Thank you.

Thank you.

Your next question comes from Samuel Wilson.

Your line is open.

And please state your company name.

Samuel Wilson from JMP Securities.

Good afternoon gentlemen.

Just 2 small questions.

First, John, or someone on the team, can you just give me quick overview of kind of the North American enterprise business.

It was a little lumpy first quarter to second quarter.

With first quarter showing deceleration or actually decline.

And second quarter showing pretty strong acceleration.

I just want to get a sense there.

Did you see a bunch of orders from small accounts?

Is is the deal size is large?

Just some color on that side.

And then I have 1 more.

This is Tom haul.

You know, North American enterprise was very strong last quarter.

And again it was really made up across the board.

I couldn't pin anything on any particular large deal.

So it was fairly consistent with other quarters.

I think that Q2 was down, I think historically Q2 has been soft for us.

So that was more in line historically with how Q2 has performed for us.

So Q3 coming back strong was what we anticipated.

Great.

And then the second question is on just maybe some of the other product lines, can you talk a little bit about Blade Server?

Are you see any activity yet in that space?

And then just in general on the kind of licensing arrangement or on the software side of your business, if you're seeing any activity there?

Yeah, unfortunately we're still not seeing any significant change in the Blade Server space.

We are still - -there's a number of new initiatives happening specifically with HP and Dell.

We'll see if that brings us anywhere.

But really from our point of view and as we've been seeing right from the very beginning of this fiscal year, I don't expect to see anything.

And I guess unfortunately we've been right in that.

And there's no sign of any change in the short term.

We haven't given up on it.

Because we think we still have tremendous differentiation it has just been pretty amazingly show.

Yeah, it's unfortunate.

And then just, I'm sorry 1 last question.

Just iControl update.

Usually you give out percentage of business that you thought was somehow related to iControl.

And just your sense.

Are you seeing more partner signups?

You had mentioned a couple of conference calls ago.

IT departments were starting to download the SDK.

Wanted to get a little color there.

Dan, this is Dan Matte.

So for this past quarter bind decisions that were implements by iControl ran at about 40% of revenue, and that's pretty consistent with the previous quarter.

We continue to see a great amount of activity with our DevCentral and people downloading the SDK.

I don't have the number right in front of me.

But probably the most significant thing that we started to see the past quarter and a half were some people around the world starting to offer products for sale that were based on iControl.

And developments that they've made there.

So certainly that continues to March forward for us.

Dan as a follow up, do you think kind of an ISV community is something you're going to work on expanding?

Yeah, absolutely.

We're sort of attacking it in 2 different ways. 1 is from the grass roots side of it.

And then the other one, of course, is with more of the major vendors as well, through the Oracles and Microsofts.

Great.

Thanks.

Thank you very much, yes.

Thank you.

Next question comes from Tim Luke.

Your line is open, and please state your company name.

Lehman Brothers.

Actually this is John for Tim this afternoon.

I was wondering, could you please comment on your wireless business?

And how the charge in there, was it up or down?

And how big it is terms of the percentage of the revenue this quarter?

Sure.

This is Dan Matte again.

As far as our wireless business, we really track that as part of Telco business overall as part of the vertical.

And it tends to vary around the 15% range historically.

And, we continue to expect to see it around there.

Last quarter was about 14%.

We're still waiting for some of the numbers to be finalized, but anyway at the end of the day, I'm expecting it will come in at about 14% or so.

Okay.

I was gone for about 5 minutes during your prepared comments.

I wasn't sure whether or not you commented on your book to bill during the quarter.

No we didn't comment on it and we haven't been asked.

It was above 1 this quarter.

It was above 1.

Yeah.

Okay.

And Steve, did you say the tax rate for this current quarter is going to be at what level?

Is that going to be 36%, 37%?

Actually, the tax rate going forward that we've referred to was there in - - for next year, starting in Q1, fiscal '05.

What we did do, and it's also reflected in our press release, we did give an absolute number for our expected tax charge.

Which includes the 1-time benefit from the reversal or elimination of our tax reserve.

So what we said is we expected that the net tax benefit, that being the 1-time benefit that we get with the elimination of the reserve, netted against the tax expense that will be recorded to be approximately 5.7 to 6.1 million.

Okay.

My last question was a quick one.

What was the Federal vertical as a percentage of revenue last quarter?

This is Dan Matte.

We look at Federal, just looking at the U.S. specifically, that would be about 6% overall.

And if we look at more generally - - or government business worldwide, then we would be in the 11% range.

Okay. 6% of your total sales is a U.S.

Federal, and worldwide 11% of the sales?

That's correct.

Okay.

Thanks guys.

Thank you.

Your next question comes from Troy Jensen.

Your line is open, and please state your company name.

ThinkEquityPartners.

Congrats on the nice quarter guys.

I've got 2 questions.

I was wonder if you guys could give us maybe an estimate on the products side?

What percentage of sales are coming from new deployments versus maybe systems that are say 3 years old and are being replaced now?

I don't know if we have that data actually, Troy.

If you look at the quarter, we did about 40% approximately of our business was new business.

Of the 60% that was repeat business, some of that can be new projects and some of that is replacement.

We just don't have that data yet.

Okay that's fair.

And how about the growth you guys are seeing?

Do you think it's market growth or maybe market share?

We'll see.

That's hard for us to judge.

We're seeing it pretty solid.

I'm hoping it's both.

But we'll see when the other results come out.

All right.

I'm actually going to ask a third question.

I think on the MagniFire acquisition conference call there was a question regarding the Israel R&D facility and what it may do the tax rate.

Any update there?

This is Steve.

We don't expect really any change to meaningful impact from our Israel presence.

And going forward in '05, we do expect that effective tax rate be to about 37%

Okay.

All right.

Well congrats again, guys nice quarter.

Your next question comes from Alex Henderson.

Your line is open and please state your company name.

Thank you.

Smith Barney.

A couple of questions.

First off, could you give us a little more clarity on the timing of the launch of Buffalo Jump within the quarter?

Since I know you've said it's just in this quarter.

But since it is the quarter coming up and we have to model the timing of that launch.

A little bit more clarity might be useful.

Okay.

Sure Alex.

This is Dan Matte.

The timing of the launch will be in the first half of September.

And do you think - - and how about the V9 software?

Same time.

Same time?

They're both linked.

And do you think that there could be any disruption or delays in ordering as a result of anticipation of that availability that might not be satisfied in the back half of the quarter?

Well, we'll see.

I mean, we're watching it incredibly closely.

As I was saying to the last question, we think that the way things are shaping up in the pipeline and the bookings already, the linearity is looking pretty normal.

So, no, I think it's going be to the fourth time we've done it.

I think we have a good handle on that.

But not complacent in any way of course.

So no risk of cannibalization or risk of order deferrals then?

Well, you can never say no risk, but we think we have it in control.

And I didn't catch the actual FirePass revenues in the quarter.

The actual of last quarter?

In the quarter just reported.

It's 3.8 million.

3.8.

Thank you.

The software side, a lot of software companies seeing some slowdown in their business late in the quarter.

Did you see any impact of that in your channels or in related software channel driven business?

No, didn't see that at all.

And, you know, this is very much a theory here for me, you know, it's not fact yet.

But if you look at a lot of the software companies that have been reporting, a lot of it's been infrastructure software based in the data center.

And my view is that a lot that spending is turning to infrastructure solutions in the internet data center.

In other words the internet and the network.

And that's why you're seeing companies not getting the growth that we got.

So are you worried about any possibility of that trend changing back to software deployment's once the infrastructure starts getting built out

I don't see it.

I don't see any change there, no

Can you give me the headcount number at the end of the quarter?

Yeah, it was 590.

590, thanks.

And on the distribution side, any plans to run any special programs to expand your distribution channel reach during the quarter or in the back half of the year?

None at this point.

We continue to look to add more on the FirePass side.

And again not only adding there, but also bringing more of our existing participators online as well.

Great, thanks.

Your next question comes from William Becklean.

Your line is open, and please state your company name.

Yeah, thanks.

Could you take about about the changing competitive environment?

In particular, what do you think Cisco's reorganization of its content networking business into its multi-service customer edge basis unit means about the market and about Cisco's strategy?

This is Dan Matte, certainly that was an interesting move.

We've been watching the structure there for some time with the business on the East Coast that resulted from their Arrow Point acquisition a few years back.

Versus what was going on the West Coast and things that were being added to the catalyst switch line basically.

Our opinion all the way along, has been that, you know, it has been a somewhat confusing for their field, let alone their customers, with the myriad of choices.

So from the standpoint of that change taking place, we have been waiting for that to happen for some time, quite frankly.

In terms of what that will mean overall, I think that, you know, certainly they're going to focus more on it.

They always have been and will continue to be a formidable competitor for F5.

And we'll just continue to watch them closely.

Can I follow up that question?

Yeah.

I mean they're moving further away from the webservers and network architecture.

Does it mean that they have less of an appreciation than you do for the importance of your strategic position in managing web APs both from a security and performance point of view?

It's an interesting observation.

We continue to believe that being tightly integrated and allowing people to inject intelligence into the network, that, you know, previously would have been resident on the application server is very important.

And presents a more efficient and effective way of people delivering their applications over time.

So them distancing themselves, you know, we believe is good news for us, in the long run.

Thanks, Jim.

Your next question comes from Matt Barzowskas, Matthew First Albany.

Your line is open and please state your company name.

Thanks, First Albany. 2 questions, first what was the percentage of revenue that came from Dell?

And second of all, would the U.S.

Federal Government, there's definitely been talk out there that there might be some more spending slowdown.

And I'm just wondering if you're searing any of that, or not worried about it going into their final fiscal quarter?

Okay on the Dell side, we don't actually give out the specific percentage of the Dell business.

We only had 1 customer above 10% which was Ingram Micro.

However a lot of Ingram Micro business contains Dell business included in it.

So the Dell business was pretty strong, but we just don't give out the actual number.

Yeah, on the Federal side, we've heard similar rumors, but haven't

seen anything at this point.

But we're keeping close tabs on it, so --

If something should happen, you know, could that affect your numbers?

Or do you think there's enough business going around that even if there is a slow down there, it won't hurt you that much?

You know, we were slow from last quarter in the Fed, and again a lot of those deals are in the pipe, so we think they're pretty much assured for this quarter.

So we'll see how it goes as we get further along.

Okay.

Thanks guy.

Next question comes from Brent Bracelin.

Your line is open and please state your company name.

Thank you.

Pacific Crest.

Had a couple of follow-up questions.

On the core traffic management business trends specifically.

If you back out security, it looks like you've seen a pretty healthy acceleration in the core traffic management business.

Tet you're at the end of kind of a product life cycle.

So - - which is a little surprising.

What do you attribute that to?

I mean, is this really, you know, secular trends that are driving the acceleration here?

You know, is it market share gains?

What do you think is the driver of the acceleration in the core business?

This is Dan Matte.

There are a couple of significant things I guess I would point out. 1. is that, yes, we are at the end of a product cycle, and part of it, part of the growth, though, is really on the back of when we introduced Version 4.5.

And introduced some of the more advanced techniques of traffic management.

And we rolled out the thing called the Universal Inspection Engine.

So by giving people the ability to look deeply into the traffic and use traffic management techniques that had mainly been associated with webservers in the past, and be able to drive that functionality down into the application server level, and even deeper as time goes on, we certainly believe that's one of the key drivers for that growth.

The other thing is when we look at the adoption in the wireless area: people using traffic management specifically BIG-IP to offload many of the security functions.

And to better tie together pieces of their wireless infrastructure to make it easier for those to collaborate, also another significant driving factor.

And then finally, really iControl, and thinking about how we've been concentrating on getting that integration going with the major software vendors well as the grass roots effort there.

To let people easily integrate through [SOP XML] with their applications and ship that intelligence on to the network.

Really, I there are sort of the big 3 things going on.

so no real change that you saw in the quarter?

John, you mentioned that, you know 40% of the business came from new customer, 60% of the business came from kind of repeat customers.

Was there a change there?

What was that mix last quarter, or has that been relatively consistent over the last couple of quarters?

Yeah.

Pretty consistent, actually.

Pretty consistent?

Yeah.

Okay fair enough.

And then I actually had a follow-up question on MagniFire. 8 weeks do this now, what's the feedback from kind of your partners that are also potential competitors with MagniFire?

And then what's been the feedback with the customers that you've actually talked about the TrafficShield product?

We've seen the acceptance and excitement around it is big.

Customers have a real problem here in terms of their applications and they realize it.

And they're looking for a solid solution that they can use.

So we've had some really deep conversations with some of our largest enterprise customers who are very excited by the product.

And also with our major software partners through the iControl relationships.

In fact, we have those conversations or some of them within the first 2 weeks of the acquisition.

Getting phone calls that they want to talk about this and see how they can utilize it.

So the excitement level is pretty high.

We're still taking a cautious approach to productizing and making sure everything is solid and stable.

And, you know, making it an F5 product before we put it out in the market.

We will have a few early access systems this quarter that we'll put into a customers and participators.

Okay.

Great.

Fair enough.

Your next question comes from Doug [Rudish].

Your line is open and please state your name.

Brookshire Capital.

Hi guys.

Just a couple of questions.

The book to bell that you ended the quarter with, was it higher or lower than your last quarter ended?

Yeah, we answer that earlier but actually you probably missed it.

Yeah, the book to bill was greater than 1 this quarter.

But was it higher or lower than last quarter's ending book to bill?

We said our book to bill exceeded 1 last quarter, and it exceeded 1 this quarter.

That's the only information that we provide on book to bill.

Okay.

Second question, there's some rumblings there were some changes at the senior level of your North American sales force structure.

If that's true, why, given the apparent underlying traction you're getting in North America, just looking at the sequential growth there?

Or is that just wrong scuttlebutt.

This is Tom.

No, we are having a change in North America.

Our gentleman that's been running it for the last 7 years just decided it was time for a change.

And so we - - his last day will be August 1.

And again, we've got 3 very seasoned individuals that are running the different regions.

They've been involved with the Company for many years.

We don't see any impact to the business.

I will be stepping in and running it, and we're beginning the recruiting process as we speak.

Great.

And last question is, I think you guys have rolled out a pretty aggressive SPIF plan for FirePass.

Can you talk about why you need to do that, or are doing it given the size of that market opportunity?

We don't really talk about the comp plan in detail.

So we really wouldn't comment on that, the compensation plan.

Obviously FirePass is pretty strategic for us, and we want to get momentum going.

But we won't go into any more detail than that.

Okay.

Understand.

Thank you very much.

Thank you.

Your next question come from Alan Davis.

Your line is open and please state your company name.

Yes, McAdams Wright Ragen.

I just wonder if we're going to get any significant bump in price points for Buffalo Jump?

And/or if there's an incremental difference in gross margins going forward a benefit there as well?

And would you expect the customers there to gravitate back maybe a little higher percentage of existing customers as you get some upgrade revenues there?

Yeah.

Well first of all on the gross margins, you know, when we design products functionality, performance all of those good things are critical.

But frankly so are the design and cogs so that we can target gross margins that fit into our business model.

And that's what we have done with Buffalo Jump.

So we don't expect to see any significance difference on the gross margins when we introduce Buffalo Jump.

In terms of the pricing, we haven't done that yet.

Obviously it will be price competitive.

We will be announcing that in early in September.

And I'm sure we'll see upgrade cycle.

In some accounts it will be fast, in other accounts it will be slow.

The thing that we've said a couple of times is that a lot of our customers, almost all of couple offers actually use our products on very very mission critical type environments.

And a lot of those customers because of that will continue to buy the existing products that we have.

The existing products today because they're tried and tested.

And then they'll probably be a slow and a mission critical space in introducing Buffalo Jump.

That's actually a good thing.

Because it allows the transition to go pretty slowly.

But I think just to answer the question over time I think that yes it's absolutely a good upgrade pass over time.

And then lastly, I guess, bringing, you know, Traffic Shield and Buffalo Jump to market, what kind of a bumper?

How would you characterize the marketing dollars to be spent in maybe the September throughout the end of the year

I will not give you a dollars, number, but Dan, you could maybe run through some of that what we do when we're devising the launch plan.

Sure.

Absolutely.

Both products, FirePass, first and foremost, we just actually had a recent release of the product.

An update Version 5.0 of the software that introduced several new features and functionalities out there.

So that - - we've just been through a cycle there, and we'll have several more releases coming up throughout the year.

In terms of TrafficShield, we're going to go through and have obviously the productization, and it will be supported by a full tour worldwide to introduce it properly to market place.

And same with Buffalo Jump.

And Buffalo Jump, too obviously yes.

Okay.

And without giving the numbers anyway to characterize kind of that jump up in marketing dollars spent?

Or how would you characterize it?

No, most of the increase in expenses in the run rate is coming from the acquisition of MagniFire.

Okay.

On a full quarter cost.

Fair enough

And as a reminder, if you would like to ask a question, you can press star 1 on your touch-tone phone.

Your next question comes from [Evan Coldwood].

Your line is open, and please state your company name.

Hello?

Evan, your line is open.

I was wondering if you guys could comment on the Radware lawsuit?

Yes, yes just quickly.

Just to recap.

We are still pursuing our own lawsuit against Radware for infringing our Cookie Persistence patent.

And that's ongoing.

As far as the lawsuit just announced by Radware, we're still investigating.

And we do not believe that we infringed any of their claims.

And obviously we wouldn't give any more detail than that.

Thank you.

I'm showing no further questions at this time.

Okay.

If there are no further questions.

Thanks for calling, and we'll talk to you next quarter.

Thank you.