F5 Inc (FFIV) 2005 Q1 法說會逐字稿

Welcome to F5's first quarter financial results.

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

Today's call is being recorded.

If you have any objection, please disconnect.

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

Thank you, sir.

You may begin.

Thank you and welcome to our first quarter 2005 conference call.

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

Julian Eames, Senior V.P. of Business Operations and Global Services;

Tom Hull, Senior V.P. of Worldwide Sales;

Dan Matte, Senior V.P. of Marketing; and Jeff Pancottine, Senior V.P. and General Manager of our Security Business Unit 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 fiscal 2005.

Next, John McAdam will review the Company's operations during Q1 and provide additional perspective on the Company's goals and outlook for the current quarter.

We will then open the call up for questions.

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In addition, an archived version of today's live Webcast will be accessible from the events page -- events calendar page of our website through April 19th.

From 4:30 p.m. today until 5:00 p.m.

Pacific Time January 21, you can also listen to a telephone replay at (866) 505-6448 or (203) 369-1869.

The 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.

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.

Please note that F5 has no duty to update any information presented in this call.

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

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

Thank you, John.

The first quarter of fiscal 2005 proved to be a strong quarter for F5.

Revenue of 60 million was above the 52 to 54 million target we had set on our October 26th conference call.

Net income of 10 million or $0.26 per diluted share was also above our guidance of $0.20 to $0.21 per share.

For the quarter, F5 saw strong revenue performance with quarter-over-quarter sequential revenue growth of 9.8 million or 20 percent.

Year-over-year revenue was up 23.9 million or 66 percent.

North America represented 59 percent of the geographic revenue mix with international revenue accounting for 41 percent.

Product revenue represented 77 percent of total mix and service revenue was 23 percent.

Security revenue, including approximately 300,000 of TrafficShield sales, was 5.1 million or roughly 9 percent of total revenue.

Sales of BIG-IP version 9, our Buffalo Jump product line, exceeded our expectations and represented approximately 30 percent of Traffic Management revenue and 37 percent of Traffic Management bookings.

During the quarter, we had one 10 percent distributor, Ingram Micro, which accounted for 16 percent of total revenue.

The book-to-bill ratio for the quarter was greater than 1.

Moving down the income statement.

Gross margin came in at 76.8 percent, comparable to prior periods and within our expected range.

Total operating expenses of 31.6 million were above our target range of 29.5 to 30.5 million.

Variable sales and marketing expenses were higher on increased sales.

In addition, we added head count in key areas to support our growth.

Our Q1 operating margin was 24 percent, up from 20 percent in the prior quarter and 11 percent in the first quarter a year ago.

As anticipated, our tax rate for the quarter was 37 percent.

On the balance sheet, accounts receivable DSO ended the period at 42 days within our target range.

Inventories came in at 1.7 million and represented approximately 32 turns on an annualized basis.

Cash flow from operations was 13.5 million and we ended the quarter with $254 million in cash and investments.

Capital expenditures for the quarter were 2.1 million and depreciation and amortization expense was 1.6 million.

We ended the quarter with approximately 650 full-time employees.

Moving on to the outlook.

For the second quarter fiscal 2005, we have set a target revenue range of 63 to 65 million.

If seasonal patterns hold true, we expect sequentially growth in AMIA and aPACK, a strong quarter in Japan and modest growth in North America.

We expect gross margins to remain within a range of 76 to 77 percent.

Our operating expenses are currently targeted in the range of 32.5 to 34 million.

Our after-tax earnings target is 28 to 29 cents per share with an effective tax rate of approximately 37 percent.

We estimate DSOs will continue to be in the low to mid 40s.

We expect inventory levels to increase within a range of 2 to 2.5 million to support our continued sales growth.

We are currently forecasting cash flow from operations in excess of 15 million.

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

Thanks, Steve.

Good afternoon, everyone.

Obviously I'm very happy with the first fiscal 2005 quarterly results. 20 percent sequential revenue growth, 66 percent year-over-year revenue growth, and an operating margin improvement to 24 percent clearly demonstrate the continued momentum in our core business.

From a geographic point of view, all the major regions met or exceeded our expectations for the quarter, with the exception of our U.S.

Federal Business, where we experienced delays in a number of projects.

In particular, AMIA and U.S.

Enterprise had strong sequential growth over the previous quarter.

Momentum in Asia Pacific remains strong and the Japan business was virtually flat versus the previous quarter, significantly exceeding our internal projections.

Some notable sales wins included the Australian Tax Office, Cafe' Pacific, Bank of Communication in China, Samsung Electronic in Korea, NTT West using IPv6, Toyota, Johnson & Johnson, Microsoft, Cendant, ABN AMRO G.E., Time-Warner, ING, eBay, Wells Fargo, Cablevision, The Limited, and several Federal project wins.

Q1 was a fast grow quarter of shipments of a new BIG-IP product, the BIG-IP 6400, the 3400 and the 1500, running version 9 of the BIG-IP software.

Customer and partner reaction to this new generation of Traffic Management product has been very enthusiastic and all products in the range exceeded our expectations from a demand perspective.

As I mentioned in last quarter's call, I believe the new functionality offered by BIG-IP version 9 with TM/OS, a Trans - Traffic Management Operating System, further increases our leadership in the marketplace and should continue to provide us with new market opportunities in the areas of application optimization, application delivery and application security.

The compelling ROI offered by the Traffic Management product combined with the host of new functionality leads us to believe that our core Traffic Management business will continue to experience growth for the foreseeable future.

New version 9 application deployment and optimizing features include connection pooling, intelligent compression, application rate shaping, IPv6 gateway and several other features.

BIG-IP version 9 also offers a host of application security features like high through put SSL encryption, resource blocking, advanced authentication, cookie encryption, firewall packet filtering and many more security features.

Continuing in the theme of security solutions, the one area, quite frankly, I was not so happy with our execution last quarter was the new security products, particularly FirePass.

We did grow security revenues by 10 percent sequentially quarter-over-quarter, so this was the lower internal target.

In fact, all of the geographies, with the exception of North America, showed pretty strong momentum.

However, we experienced delays in a number of projects in U.S.

Enterprise and U.S.

Federal deals and missed our (indiscernible) by approximately $1 million.

I continue to believe that our competitive position from a product perspective is very strong and I was pleased to see the excellent competitive write up given to FirePass in a recent Infraworld Review, where we received a score of 9 out of 10.

While this compares very favorably with our competitive products, we need to improve our channel execution.

That will be a major focus area in this coming quarter and our action plans to remedy the situation are in progress.

We successfully launched TrafficShield, our new application firewall solution, in early November.

The interest level from customers and partners has been excellent and we had some exciting new project wins during the quarter.

TrafficShield's unique application floor model prevents application attacks which cannot be prevented by traditional firewall solutions or intrusion prevention and detection systems.

As a result, this new concept does require some sales evangelizing, which has an effect on the sales cycle time.

From our experience in quarter one on the evaluation process with prospective customers, we now believe that our original projection of 8 to 12 million over the fiscal year will probably stretch out to the calendar year.

As far as the general Q2 business outlook is concerned, Steve has already talked about the overall range of 63 to 65 million in revenue and $0.28 to $0.29 in EPS.

These Q2 targets have taken into account a year end budget flush estimate of approximately 2 million, mainly in North America.

From a product standpoint, we expect to see continued strong momentum in our core Traffic Management business, driven by the new BIG-IP platforms and BIG-IP version 9 software.

In addition we expect to see continued sequential growth with FirePass in all geographies, including North America.

We also expect to see sequential growth in TrafficShield revenue this coming quarter, albeit based on relatively low numbers.

From a geographic viewpoint, we believe we will experience continued growth in AMIA and strong sequential growth in Japan as we come to the close of Japan's fiscal year end.

In North America, our Enterprise business has been down sequentially in the first part of the quarter over the last three years so we expect it to be flat to down in the quarter.

However, we would expect the U.S.

Federal business to be up sequentially and overall we expect to see modest growth in the combined U.S. business areas.

We also expect to gain continued growth from our worldwide (indiscernible) revenue stream.

In conclusion, we do expect the growth in our overall business to continue as we move forward in fiscal year 05 and we continue to invest in new products and the integration of an existing technology.

Overall, I believe F5 is very well positioned to be a leader in the application traffic management and application security markets.

I would like to thank the entire F5 team and our partners for their efforts in Q1 and with that, we'll hand the call over for Q&A.

(OPERATOR INSTRUCTIONS) Your first question comes from William Becklean.

Your line is open and please state your company name.

Thank you.

Hey, great quarter.

Thanks.

In the past, you've commented on the amount of business that was driven by the application software providers.

Can you give that number to us?

Oh yeah.

We reckon that is in the 40 percent area.

That sounds a little lower than it's been in the past.

Actually, we discussed that before the call and I know last quarter I actually said 45.

Right.

But looking at it, we think it is nearer 40, so it's pretty similar to last quarter.

Apologies for last quarter.

It is a very subjective measurement because we don't actually get purchase orders from the partners as the influence they have in the deals.

Pretty close to what it was last quarter.

Just a follow-up question.

These revenue numbers are kind of extraordinary growth numbers.

What do you attribute the strength of the -- continuing strength of the business to?

First of all, I think the bottom line is the return on investment and then from a competitive point of view, with version 9, we just don't think there is anything out there that competes.

So the combination of that and then the combination of thinks like iControl that we just talked about, where we have companies like Oracle at a last -- Oracle Applications at the last user conference holding workshops by Oracle staff in how to configure BIG-IP.

Things like that is driving the growth.

Thanks.

Congratulations.

Your next question comes from Ehud Gelblum.

Your line is open and please state your company name.

Hi, David at J.P. Morgan.

Thanks.

Can you hear me?

Yes.

Oh, excellent.

A couple of questions, if I could.

First of all, could you talk a little about the Federal business and how that trended in the quarter?

What kinds of contracts are you winning there and competing against?

And then if I could dig a little bit deeper into your comment, John, about being a budget flush in North America.

How do you recognize when there is a budget flush versus something else going on in the business?

And how pervasive do you think that budget flush was?

Let me do the budget flush and then Tom Hull can do the Federal question.

On budget flush, you are right, first of all, it is subjective.

It is not like when we get a purchase order, it actually has budget flush on it.

It doesn't.

The other thing is we do rely on the sales force telling us that we really didn't expect.

The customer phoned us up and said they have extra money in the budget and we get some orders.

Quite frankly, any sales force on the planet might not tell you that information because they like to say they win all the deals.

It is our best estimate, but we think it is reasonably accurate and it was mainly in North America that we saw it.

What percent do you think -- how much do you think it boosted the revenues by?

I'm sorry. (indiscernible) Roughly about $2 million.

Okay.

This is Tom.

On the fad, we saw a lot of push out on spending and a lot of it was due to appropriation through Congress and delays of funding of projects.

So, again, we see the deals.

They are still there and we just saw a general delay in processing those orders.

So we still have a very strong presence in the Fed and we look forward to growth coming up in this next quarter.

What do you attribute the push outs to?

Do you think it has something to do with the election and --

And the war.

I think is what we are hearing.

The war is not going to change any time soon, but the election certainly does.

Do you think it rights itself in the next couple of quarters?

We think it will, yes.

And seasonally we've seen this as well, where when you get to that mid-year, you tend to get budgets opening up as well.

Then tend to open up in February actually.

Thank you very much.

The next question is from Erik Suppiger.

Your line is open and please state your company name.

Pacific Growth Equities.

And congratulations on a stellar quarter.

On the SSL front, do you think that you are losing any market share there?

This is Jeff.

That is unknown yet because everybody has to report and we won't have the statistics until probably sometime in March when people like Infonetics report it.

So we don't really have the answer to that question at the moment.

We don't think so, but it is hard to tell.

In terms of our win/loss ratio, typically when we did lose during the quarter and we did lose some, it was where we were late into the deal and that was typically against the Juniper product.

But that wasn't that frequently and we won a lot as well.

So, competitive wise we are in really good shape.

A number of the deals in the Fed -- the U.S.

Federal Government were moved out as Tom mentioned and some were SSL VPN deals.

That's a very good point.

It was almost to the tune of a million dollars.

Just slightly below that in Federal in terms of the difference, so that accounted for a lot of the internal projection.

Do you think that you could see pickup in Japan in particular in the March quarter with the SSL?

Yes, yeah, we do.

Would you anticipate the NTT might start to start its purchasing?

Well, they have actually started -- we have been getting orders from NTT but just in general, Japan tends to be stronger.

This is the strongest quarter that we are in now in the year for Japan and we expect that to be across the product line.

Okay.

Then, secondly, we heard rumors of extended lead times during the course of the quarter.

Were there any issues to cause any constraints on manufacturing or anything like that during the course of the quarter?

This is Julian.

What we had is obviously the higher demand than we expected in the forecast at the beginning of the quarter and we also had one supplier cause us some late deliveries around November.

We righted that supply chain and we are on top of the supply chain for the rest of the product and we caught up again by December.

So, all the lead times were reduced by the end of the quarter.

They were.

That's correct.

Congratulations again.

Thank you.

Thanks.

The next question is from Tim Luke.

Your line is open and please state your company name.

Hello?

Can you hear me?

Yes.

This is actually Jiong Shao for Tim.

A great quarter.

Congratulations.

First of all, Federal, I know in the past you have provided percentage of revenue for U.S. Federal.

I was wondering could you please give that number to us for this quarter?

U.S.

Federal was 5 percent, which indicates the slippage that we talked about.

Okay.

And also we had a question on Japan.

Because Japan seasonally, it should be a weaker quarter, but you saw flat quarter in Japan.

I was wondering what was some of the drivers behind that better than expected quarter in Japan?

We were happy about that because you are absolutely right, seasonally it does tend to be down.

It was basically business.

Business wins and good business environment.

I don't think anything specific that I'm aware of.

Is that across the Buffalo Jump and the FirePass or any particular segment of the products?

Actually, a lot of it was the continued existing Applications Switch products.

In Japan they tend to be slightly more reticent in going to new products than some of the other geographies, so a lot of it was the traditional products.

How much was Japan in the December quarter?

About 15 percent of revenue.

15 percent.

Okay.

Another question we had was on the gross margin.

You obviously had a greater performance on your topline and it seems, however, that the gross margin was sort of down just a little bit.

So I was just wondering why is seems like the upside in the revenue did not flow through to the gross margin.

We had established a target which has long been our target of the 76 to 77 percent.

We are at the high end of that range, very close to 77 percent.

I think we were within 20 basis points of the previous quarter.

You know, I -- I think in any given quarter, we will have some very small variation within that range for things such as mix and so forth.

On that, but I would say, this absolutely met our expectations.

What we did say is we -- when we transitioned to the new products that they were designed to yield comparable margins to the platforms that they were replacing and, in fact, that is what we saw this quarter.

So, we believe -- we're pleased with the margin performance for the quarter.

Okay.

The last question we have is on your cash.

Any thoughts about how you might use over $250 million cash on the books?

There are no immediate plans for use of that cash.

What we have said is that it is likely we will hold steady on our cash for the balance of the year.

It does give us some flexibility in terms of potential new business development opportunities, should those arise.

And then likely a year from now or so, we will sit down and see where we are and understand what the future cash needs of the business are, and make a call at that time.

So I think steady as she goes for now.

Thanks, guys.

Great quarter.

Thank you.

Your next question comes from Samuel Wilson.

Your line is open and please state your company name.

Hi, it's Sam Wilson from JMP Securities.

Just a couple of small questions for you this afternoon.

First, John, I noticed on the list of customers -- eBay, Microsoft, G.E. -- these are a lot of repeat customers.

Can you talk a little bit about , are they upgrading existing, are they finding new uses, especially with BIG-IP 9?

Do you feel like you can get saturation of some of the large customers or do you have a long amount of runway to go with them?

It is the latter.

We think there is a long runway.

If you look at GE, we are involved in a number of projects and that number continues to increase.

eBay is slightly different in the sense that a tends to be a lot linked to their growth and their usage of our products.

And, you know, they're opening up more and more data centers, but we think there is still a lot of runway there.

Our experience is when we penetrate a large Fortune 500 potential account or business, all the metrics go up.

And I just don't see that -- in terms of across-the-board, by the way, we did about 45 percent new business and 55 percent existing.

Okay.

And in December you sent out a coupon for an extra 20 percent discount on FirePass.

What was kind of the driving rational behind that?

Are you just finding that you want to be a little more price aggressive in the market or what was the thought process behind that?

Sam, this is Jeff.

That's basically -- on any quarter, we put out different kinds of promotions, whether its for the channel or the end-user, whether it's a discount or other types of activities.

And that was the promotion that we came out with for the quarter.

So, it is part of a regular marketing program that we have done quarter-over-quarter, year-over-year.

And for example, when we are going for market leadership we do that.

We did it with SSL encryption.

We did that in a number of quarters and it was very successful.

You'll see us doing stuff like that all the time.

This one, for some reason or another, seemed to become mega public, which was interesting.

Well, the answer is because I think all the analysts got it in their e-mail box.

That was the reason for that one.

One last question for Steve Coburn.

Can you give us an update on where you are thinking about the operating model right now, given operating margins now well above 20 and kind of what the thought process there is?

What we've said in the past, Sam, is that we believe we've designed and architected a business model that should yield sustained margins with continued revenue growth in the range of 20 to 30 percent, is what we've said historically.

We are obviously well into the range -- towards the middle of it.

I don't think we have recalibrated, you know, our expectations beyond that at this point in time, so I'm not sure that we're -- you know, we're in a position to update expectations on that.

But other than to say the business model is behaving as we anticipated with the revenue growth so, for now, we are staying with that range that we have discussed in the past.

Okay.

And then can you give me a sense for what you are thinking about head count additions for the new calendar year?

Last quarter we said, you know, if we had the flexibility to add new heads with continued revenue growth that we expected that to be in the range of 20 to 30 heads per quarter.

We actually added more heads than that this quarter.

We were able to do with the over performance on the topline.

I think just to update that expectation, I think we would probably be in the range of 20 to 40 heads per quarter looking ahead with continued revenue growth.

Thanks a lot, gentlemen.

Your next question comes from Ryan Hutchinson.

Your line open and please state your company name.

WR Hambrecht.

Great quarter, guys.

Just a couple of house keeping questions and then one on the product road map here.

In terms of the overall government business, in the past you have given a number there.

I know you said that U.S. government was 5 percent but perhaps the overall government business.

And then just in terms of the numbers in Asia and AMIA, as a percentage of revenue.

And then a quick product follow-up question.

Do you have the overall government?

Yeah.

Go ahead.

Overall government we estimate for the quarter was 9 percent.

9 percent, great.

Worldwide.

Okay, and then Asia and AMIA were up, sequentially is that, correct?

Yes.

As a percent, I think you gave that last quarter on the call.

Give me a few minutes to get that.

Why don't you ask the product question and we'll get that to you.

Sure.

Just on the product road map here maybe talk about the opportunity on the new product front with Montreal and the market opportunity you see there in terms of specific timing, G.A., et cetera?

Okay.

I'm going to pass to Dan Matte and he can answer the question.

In case anybody is wondering, Karl Triebes is not on the call today and that is because he's got the flu.

He actually came in and we told him to go home so we wouldn't catch it.

So in case anybody is wondering.

Anyway, Dan.

This is Dan Matte.

Ryan, what we're seeing with people doing with the Traffic Management Operating System -- sort of leading on to the previous question -- adding on to what Sam had asked in are we seeing lots of runway in terms of how people are using this and intend to add value to their flows as it goes in and out of their enterprise.

We are seeing in -- since the introduction of version 9, a tremendous amount of activity in areas such as DEV central, where people are coming up with all sorts of new and novel ways to use our Traffic Management Operating System to make the performance of their applications faster, more secure and require fewer resources.

As far as it goes, our maps to Montreal, what we are seeing is that people want more and more of these operations to be performed on their traffic and Montreal is a solution to do that.

Obviously lets people scale that processing power independent from the IO connectivity in their network.

We are looking at Montreal as basically, you know, in a beta format in about a year from now.

And, you know, going with that and filling out what -- building on version 9 and the Traffic Management Operating System and let people scale the decision making that they are making on their network traffic with it.

Is that a change in terms of timing expectations from say a year ago.

I was --

Yeah, what has been happening, as we have been developing these products, we make decisions along the way to introduce point products.

In fact, we will have another fairly big product before Montreal that we haven't announced and we will talk about it in future calls you, but that is part of the development process.

I guess we will stay tuned for that.

Thank you.

Great quarter, guys.

Your next question comes from Richard Sherman.

You line is open and please state your company name.

Janney Montgomery Scott.

I'll offer my congratulations as well.

I had a question about the -- sort of the lengthening of the expectations of 8 to 12 million coming out of the new security product area.

Can you talk maybe about whether there is end market demand issues here, whether there are some versioning issues or why do you think that it will take you an extra -- a little extra while to get to the 8 to 12 million?

I'll answer and then maybe Jeff can comment as well if he sees more additions are required.

We had some really good wins in the quarter.

A lot of them were evaluation unit wins.

In other words, the customer -- we sold to the customer, we created the demand and put the evaluation in.

That just by definition takes longer than when you don't have to do the demand creation.

It is very much that.

We think that that will accelerate as customers become more and more aware of the fact that we have got this solution.

From a partner perspective, it is exactly the same.

You have got to train the partners, make them know how to sell it and we're just seeing a little bit slower than we did with FirePass, which is why we put the 8 to 12 out over the calendar.

There's one other thing and this actually relates to FirePass as well as TrafficShield.

Frankly, Buffalo Jump is very hot right now in terms of selling.

A lot of the focus of our sales force has been on the partners in Buffalo Jump so we are making sure that they also see the other products in the portfolio that they have got.

That was an element of it as well.

Just a couple of comments.

The sales cycle on TrafficShield is a bit longer and there's a bit of educational process that takes place differentiating it from standard network perimeter security product.

However, we did spend a lot of time during the quarter training partners.

We trained up 8 very highly specialized partners in North America, who are now out there building pipeline and selling.

And we did the same in AMIA and you should realize that we are only selling the product currently in North America and AMIA because the internationalization comes a little bit later for Chinese and Japanese.

So, those are the 2 geographies that we're focused on currently.

Okay.

It sounds like there is noise out there in app firewall versus network firewall and some of the competitive technologies and you think it will take an extra quarter or two for that message to breakthrough?

Exactly.

And that's pretty standard in an early stage market.

Remember, this is, you know, a market that is really starting to grow.

I liken it to being a year or year and a half behind the SSL-VPN market in terms of its maturity state.

Okay.

So you don't feel like there is any versioning issues on the TrafficShield release -- you feel comfortable with the technology?

Yeah.

Or do you think you need an incremental release for ease of configuration and those type of things to come along (indiscernible) to help you get through -- to grow much more quickly?

No, we installed the systems this quarter like John said in a number of significant accounts and that is going well.

Of course, we will continue the development process and bring out new releases on a regular basis as we normally would, but we are not waiting for anything in particular at the moment.

Okay.

Thanks very much.

Congratulations.

Just while we're on that subject, this may be worth mentioning that we will be making some product announcements tonight.

So give me five minutes or a few minutes on that, Dan.

Later on this afternoon, there will be a couple of announcements surrounding FirePass specifically.

We're going to be announcing a new version of FirePass, version 5.4, and it is really focused on delivering the enterprise class type of product that people are asking for out there.

So we have seen the need in the SSL-VPN market to not only deliver advanced features but rise above some of the fray in terms of the feature (inaudible) in the marketplace, and people asking for these devices to be robust to provide things like bale over, greater degree of scalability, less management requirements around that.

So you will see this version 5.4 is very centered around that and really delivers what F5 has become known for in the market and the Traffic Management space and applies all of those values into the FirePass product.

The second announcement that also is in the FirePass realm is that we're going to be introducing a new version of the FirePass product called the FirePass 600.

And the FirePass 600 is basically a smaller version of the FirePass product that is targeted for the small, medium business.

So basically for people that have employees running around, don't have a lot of IT resources and need to provide a secure remote access solution for them, there is a product being introduced by us that fits the price point that they want as well.

Okay.

If we could have another question.

Next question comes from Joanna Makris.

Your line is open.

I'm wondering if you could comment a little bit about the wireless business as a percentage of sales, firstly, and just general trends that you are seeing in that part of the business?

This is Dan Matte.

The wireless business is running at about 15 percent of our bookings. worldwide.

From a trend standpoint and how people are using our products, the utilization model has tended to be relatively stable, meaning that people are incorporating our products into SMS and MMF solutions.

They've also been integrating our products into supporting SIP or Voice Over IP solutions as well.

I think as we get more of our Telco and wireless provider customers adopting version 9, we will see that utilization model change a little bit over time too and it will focus more on making it easier for their disparate systems to be able to cooperate together and deliver those solutions for their customers.

Next question.

Next question comes from Brent Bracelin.

Your line is open.

Please state your company name.

Pacific Crest Securities.

Thank you.

I had a follow-up question on iControl.

You did mention there wasn't a lot of change there in the mix.

Could you talk about maybe the -- if there was any sort of noticeable shift amongst the iControl partners in the quarter?

Brent, this is Dan Matte.

A shift from the partners standpoint, not really.

We continue to have Microsoft and Oracle really leading the charge.

As John mentioned earlier, lots of great momentum around both of them.

Oracle items surrounding their 11-I.

Also you may have seen us mentioned in terms of their Mega Grid project as well, and using iControl as a way to incorporate Traffic Management into that solution.

Microsoft -- we have continued to see not only advances in terms of coordination and integration with things like live communication server, but also with many of their demonstration centers around North America and we expect that to spread farther around the globe.

Another area that I guess I would point you to, I mentioned before in terms of DEV central, when we launched version 9, we relaunched DEV central, which is a place for the development community, if you will, the grass roots effort, to get together and be able to share information in terms of how to use iControl and also now, how to use I rules in version 9.

And in the past 3 months, we have seen the number of registered users double for DEV central.

We have seen lots of end-users beginning to post their own I-rules to share with people.

We have a bunch of different forums with different topics going on.

We see a lot of momentum around both of those topics.

From a strategic standpoint, obviously you guys are seeing accelerated growth from the BIG-IP ahead of that upgrade.

You have 2 security products now out in the marketplace.

Is there a third act here that we should start to contemplate as far as something else you guys plan on pursuing let's say in 2005?

Or is the focus going to continue to be on kind of executing within Security and Traffic Management?

Our focus is executing in the (indiscernible) and application arena.

And we believe very strongly that the software application oriented type core competency, you need to do that.

And that's why, when you hear us talking about security, we are talking about application security.

There is every chance we would expand if we saw an opportunity in the (indiscernible) space.

In the short-term however, our big strategic initiative is integration.

So integrating FirePass with BIG-IP; integrating TrafficShield with BIG-IP and that is what you are going to see in the sort of medium term.

Fair enough.

My last question would be on the competitive landscape.

Obviously Cisco is now talking up traffic management and you have Juniper yesterday just also talking up traffic management.

You have, not only your results that are posting very strong results, but also some of the private companies that are also benefitting from a resurgence in interest for traffic management.

How do look at the competitive landscape?

What are your kind of defensive strategies or offensive strategies to, you know, from a -- to either prevent competitors from kind of coming after the space or protecting kind of the assets you have built?

Well, that is a big question.

Anyway, we -- from a competitive point of view, we really believe version 9 is way out there from a leadership perspective.

We have introduced some performance comparisons -- comparative comparisons from a functionality point of view and not too long ago.

I would encourage anybody to look at our website and see how strong version 9 actually comes.

The other thing is that we talked about iControl and the application programming interface we've got.

That's a (indiscernible).

We feel good about it and, frankly, I like to hear people doing well and talking about Layer 4 and Layer 7, because it effectively underwrites what we have been saying for a couple of years, as well as our numbers have been doing it.

Thanks a lot.

The next question from Larry Petrone.

Your line is open and state your company name.

Decision economics.

John, I was wonder if you could provide a little bit more color on the mix of shipments of Buffalo Jump during the quarter.

I'm particularly interested to see what type of interest you had in the 1500 and 3400 during the period?

We don't get into that level but as I said in my introduction that the 3 products in the range all met or exceeded our expectations but, as you can expect, typically the volume is at the 1500 and the highest revenue tends to be the 6400.

Very similar to the previous applications that they've replaced.

No big change in the path there.

Did the 1500 bring new customers to F5 or was it pretty much the same type of customers you've been seeing in the past?

New types of customers or new customers?

New customer categories.

I am just wondering if the lower price points on the 1500 brought in a new category of customers to the company than you have traditionally seen, for example?

Not really.

In fact, the 1500 is a similar price point to the previous version.

There has not been a significant change there.

Just a follow-up question on the head count addition, Steve.

I wonder, of the 20 to 40 heads you mentioned earlier, are the majority of those heads going to be -- are they going to be split evenly between SG&A and R&D or do you think a lot of that will be in the sales organization?

Well, for example, the 40 adds that we had this quarter, roughly half of those were in the sales organization with the remainder going to service and PD primarily.

I see.

Okay.

Thank you.

As a reminder if you would like to ask a question you can press star one.

Your next question comes from Alex Henderson.

Your line is open.

Please state your company name.

Great, thanks.

City.

A couple of questions.

First off on the competitive front, you just answered a question I thought was a good one to be delving into a little bit more.

Can you talk a little about the architectural design differences between what you are doing and what Cisco and Nortel have done in the past and what kind of a gap that creates relative to catching up to what you just offered?

It all comes down to the basic fact that we have always been convinced that Layer 7, whether it is security or whether it is traffic management, but more specifically in traffic management, from our point of view in terms of our core business, is software based.

And it is all about application, functionality and, of course, speed.

Speed along with the application.

When we started on that path of basically building our products on UNIX, building them on Intel, using standard commodity building blocks to do that, most people thought that is the wrong way, you should be looking at ASIC, et cetera, et cetera.

We were convinced that software was the main route to go.

We do use ASIC, as you know, wherefore, a repetitive type request, but overall it is all about software.

Then link that to the fact that our approach has been to introduce an API, an application programming interface, which has the iControl feature.

And, again, we think that is a big barrier to entry.

We have done that with FirePass and we're doing it with TrafficShield as well.

We are doing exactly the same technique and any integration.

We don't know anybody that is as far advanced or even close to as far advance as we are in terms of that integration road map.

I think it is a big barrier to entry.

Sure.

Alex, this is Dan Matte.

The other thing I would add to what John said is our approach with the Traffic Management Operating System is significantly different from anything that a Nortel or Cisco has done over time.

If fact, any of our competitors out there today, whether they're some of these upstart folks or the more (indiscernible), as I mentioned.

The biggest difference is that Traffic Management Operating System has all of the abilities to, in essence, stop traffic, if you will, inspect it, manipulate it, alter it, encrypt it, add all sorts of value to it, and then send it on its way.

Whether that's back to its server or on its way out the network to an end user or, indeed, another machine.

Other company's approaches has been to sort of do things on a packet by packet basis and the huge difference that that makes is that they are very limited in terms of the amount of value that they can apply to the traffic flows going in and out of their device.

I think the huge barrier to entry for us is really Traffic Management Operating System.

For anybody to try and duplicate that approach, it has been many, many man years in development and I think you will see us introducing more and more interesting functions based on that ability to add value to traffic.

So what you're saying is that you are dealing with packet flows as opposed to just single packets, to the extent that the security companies talk about deep packet inspection, they are only looking at one packet versus a flow of packets?

One person that we have been dealing with likens it to -- uses the terminology application fluency and the way he explains it is that other approaches would be able to say, hey I recognize that conversation as being Spanish.

I have no idea what they are saying, but I know it is Spanish.

Where as with Traffic Management Operating System, we can actually be part of the conversation and understand Spanish and do the right thing based on what's going on across the wire.

Have you seen any competitive responses to your success by either offering pricing structures or discounting or anything of that sort from Cisco, Nortel or the privates or any of the other players?

To date, I have seen some responses from the privates.

Haven't really seen anything in a big way from the majors.

Second question -- going back to the TrafficShield product.

It sounds like the issue here is almost exclusively the time it takes to train people on or missionary selling exercise in getting adoption as opposed to anything fundamental to the technology or fundamental to the way you are offering it or designing the product or any of that sort.

Is that correct?

Absolutely.

In fact, where we have done evaluations and with the customers had time to do the evaluations, they have placed orders.

On the FirePass side, was there any change in Juniper's attack in the marketplace that impacted FirePass at all?

No, our issue with FirePass was absolutely in North America and then, frankly, it was a lot to do with some of the slowness in Federal.

If we'd have -- if that would have happened quicker, we would have met the projections, so we were roughly a million out.

The momentum elsewhere has been very strong.

AMIA, aPACK, very, very strong take up.

One last question and take this in the right spirit, guys.

Given how awful your stock is behaving, are you guys going to use your cash to buy back stock?

Just kidding, guys. (laughter) Thanks.

Great quarter.

The answer to that question actually which is -- we discuss the use of cash at board meetings and we haven't done that actually for a little while.

We will do that at future board meetings.

As Steve said, we don't have any plans in the short-term, but we will think of you because we are clearly generating cash and you saw that for this quarter we expect to generate a very strong cash flow operations again so it is something we will continue to look at.

It wasn't a serious question.

I know.

Thanks, guys.

I'm showing no further questions at this time.

Okay.

With that, thanks for coming and we will talk to you last quarter -- next quarter.

Thanks a lot.