F5 Inc (FFIV) 2005 Q4 法說會逐字稿

Welcome to the F5 financial results. [OPERATOR INSTRUCTIONS]

I'd now like to turn the call over on to Mr. John Eldridge, Director of Investor Relations.

Thank you, sir, you may begin.

Thank you and welcome to our fourth quarter and fiscal year 2005 conference call.

Speakers on today's call are John McAdam, President and CEO and Andy Reinland, Senior VP and Chief Financial Officer.

John Rodriguez, Senior VP and Chief Accounting Officer, Julian Eames, Senior VP of Business Operations and Global Services, Tom Hull, Senior VP of Worldwide Sales, Dan Matte, Senior VP of Marketing, Jeff Pancottine, Senior VP and General Manager of our Security Business Unit, and Karl Triebes, Senior VP of Product Development and Chief Technology Officer are also present and will be available to answer questions following our prepared comments.

Andy Reinland will begin today's call with a preview of the financial results for the quarter--review of the financial results for the quarter and the year just ended, and our current outlook for the first quarter of fiscal 2006.

Following Andy's comments, John McAdam will review the Company's operations during Q4 and add his perspective to the Company's goals and outlook for the current quarter and the year ahead.

We will then open up the call for questions.

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

In addition, an archived version of today's live webcast will be accessible from the events calendar page of our website through January 18.

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

Pacific time, October 28, you can also listen to a telephone replay at 866-396-7642 or 203-369-0525.

Passcode for the replay is F5 earnings.

Except for the historical information presented, our discussion today contains forward-looking statements, which include words like 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 described in detail in our SEC filings.

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

Before I turn the call over, I'd like to also remind you about our upcoming analyst investor meeting at the Omni Berkshire hotel in New York on November 1.

If you have not registered for this event, but would like to do so, please contact Carolyn Burkhart at 206-272-6590.

For those who can't attend the meeting, there will be a live webcast and an archived version will be available through Friday, November 18.

The link for the live webcast and the archive version is www.f5.com/F5/IR/analystwebcast.html.

If you have any questions regarding the meeting or follow-up questions from today's call, please direct them to me at 206-272-6571.

Now I'll turn the call over to Andy Reinland.

Thank you, John.

The fourth quarter of fiscal 2005 was a solid quarter, completing another year of strong growth and improving profitability.

Before I go through the numbers, I want to call your attention to three factors effecting comparison between the results for the quarter just ended and prior results.

During the quarter just ended, we began expensing stock-based compensation.

For pro forma comparison, $3.3 million representing this expense, net of income taxes, is removed from results.

Last year in the fourth quarter of 2004, we reversed the valuation allowance on our deferred tax assets and began recording income tax expense.

This resulted in a one-time net benefit of $5 million.

For pro forma comparison, we are removing this benefit from Q4 '04 net income.

And during the first three quarters of fiscal 2005, our tax rate averaged 35%.

However, for the quarter just ended, factors relating to valuation allowance adjustments resulted in a tax rate of approximately 32%.

For pro forma comparison purposes, we will calculate Q4 2004 and fiscal 2004 net income using the comparable rates from the current periods.

In addition to my discussion of the reported results for the quarter and the year just ended, I will provide pro forma results taking the above factors into account.

In our guidance for the current quarter, I will also provide a pro forma earnings range to facilitate comparison with prior periods.

Please refer to the consolidated statements of operations in our earnings release, which contains a reconciliation of reported and pro forma results.

Now for the numbers.

For the fourth quarter of fiscal 2005 ended September 30, revenue and earnings exceeded the targets of 76 to 78 million and $0.29 to $0.30 per share we set on our July 21 conference call.

Revenue of 80.6 million was up 61% over the same quarter last year.

Quarter-over-quarter, revenue grew 7.5 million, or 10% sequentially.

Reported net income for the quarter was 15.7 million, or $0.39 per share.

This compares to fourth quarter 2004 net income of 15.8 million, or $0.43 per share, which includes the previously mentioned net tax benefit of five million.

Pro forma net income for the quarter just ended was 19.0 million, or $0.47 per share, which was above our guidance.

This compares to prior quarter net income of 14.0 million, or $0.35 per share, and prior year Q4 pro forma net income of 7.3 million, or $0.20 per share.

North American revenue represented 59% of overall revenue and international accounted for 41%.

North America revenue was up sequentially, driven by increased federal sales.

Although North American enterprise revenue was down sequentially, enterprise bookings were up from the prior quarter.

Revenue from Japan was up as expected from the historically slow June quarter.

In addition, we saw sequential revenue growth in Asia-Pacific, while revenue in Europe was essentially flat.

Product revenue represented 78% of the total mix, with service accounting for 22%, comparable to the prior quarter.

Total revenue from security products was approximately 8.7 million, up 15% from 7.6 million in Q3 and 89% from 4.6 million in the fourth quarter of last year.

During the quarter, we had one greater than 10% distributor, Ingram Micro, at 17.5% of total revenue.

Continuing down the income statement, gross margin was 77% comparable to recent quarters and within our target range of 76 to 77%.

Operating expenses, including stock compensation expense, were 41.6 million, below our target range of 42.2 to 43.7 million.

Pro forma operating expenses were 37.4 million, within our pro forma guidance range.

On a pro forma basis, the operating margin was 31%.

This compares to 27% in the prior quarter and 20% in the fourth quarter of last year.

Turning to the balance sheet, accounts receivable DSO of 47 was within our target range and comparable to the 46 days reflected last quarter.

Inventory of 2.7 million was up slightly from 2.3 million in the prior quarter. 32.7 million in cash flow from operations exceeded our target and contributed to cash and investments totaling 365 million at quarter end.

Capital expenditures for the quarter were 2.5 million, and depreciation and amortization expense was 1.9 million.

We ended the quarter with approximately 790 full-time employees.

Now I will briefly review the results for fiscal 2005.

Net revenue was 281.4 million in fiscal 2005, representing a 64% increase over the prior year.

Security revenue of 27.8 million for fiscal 2005 accounted for 10% of total revenue and was up 120% from 12.6 million in fiscal 2004.

Excluding security revenue, our core business grew 60% year-over-year.

Annual reported net income was 51.7 million, or $1.34 per share, compared to net income of 32.9 million, or $0.92 per share in fiscal 2004.

On a pro forma basis, net income for fiscal 2005 was 55.1 million, or $1.42 per share, compared to 18.9 million, or $0.52 per share in the prior fiscal year.

In fiscal 2005, the Company generated 85 million in cash flow from operations, more than doubling the previous year.

Moving on to the outlook.

For the first quarter of fiscal 2006 ending December 31, we expect revenue in a range of 85 to 87 million.

We expect gross margins to remain at the 77% level.

Our operating expense targets are 45.7 to 47.7 million, including stock compensation expense.

Excluding this charge, we anticipate operating expenses in a range of 40 to 42 million.

Our Q1 earnings targets are $0.33 to $0.34 per share on a GAAP basis, and $0.44 to $0.45 per share on a pro forma basis.

We believe we will continue to see DSO's at the mid-to-upper 40-day level.

We expect inventories to stay within a range of two to three million.

And we believe we will generate cash flow from operations in excess of $30 million.

Although we do not provide annual guidance, I would like to share some guidelines that may be useful in modeling our projected fiscal 2006 results.

If current market conditions persist, we believe the Company can achieve sequential growth in both revenue and earnings for the balance of fiscal 2006.

We see gross mar--margins remaining at current levels.

DSOs should remain in the current target range of mid-to-upper 40 days.

Capital expenditures are expected to be approximately three million per quarter.

Based on current market rates, we expect to earn between 3 and 3.5% on cash and investments.

Beginning in the next quarter, we expect an effective income tax rate of 36%, that excludes the tax affect of stock-based compensation expense.

However, as a result of our continuing net operating loss carry-forward, we do not expect to pay federal income taxes through fiscal 2006.

And finally, with respect to operating margin, we expect some dilution to operating margin, as we integrate our recent acquisition of Swan Labs into our operations.

We believe over time, we have a business model that can achieve and maintain pro forma operating margins in the low 30s.

As always, our goal is to maintain an appropriate balance between improved profitability and reinvestment in the growth of our business.

We will update you quarterly on our progress toward this goal.

With that, I will turn the call over to John McAdam.

Thanks, Andy, and good afternoon, everyone.

I'll take a few minutes to cover some of the many highlights in fiscal year 2005, talk in some detail about Q4 results, and then comment on the current business climate and our outlook going forward in fiscal 2006.

The F5 team has a lot to be proud of with the progress and achievements in fiscal 2005.

To allow like-for-like yearly comparisons, I have not included the effect of expenses from stock-based compensation, which came into effect in Q4.

Overall, year-over-year comparisons were very strong across all our key business metrics.

With our Q4 performance, we delivered our 11th quarter in a row of sequential growth in revenue and operating margin.

I am particularly delighted with our annual revenue growth of 64%, and our ability to deliver sequential growth in our operating margins, exiting the year with a 31% quarterly operating margin, excluding option expensing, as I mentioned earlier.

We entered two--fiscal year 2006 with a very strong balance sheet, including over 300 million in cash and investments, and that is after paying 43 million cash for the acquisition of Swan Labs at the beginning of the current quarter.

We continued to grow market share during the fiscal year, in both the Layer 4-7 market and the SSL VPN market.

The most recently reported share results in the Layer 4-7, as measured by Dell'Oro, show F5 getting an impressive 11 points during the year, with a market share of approximately 30%.

We solidified our position in the SSL VPN market and gained three points of market share, to position F5 with a 15% share of the market, as measured by Infonatics, Our security business, overall, was up a very healthy 120% year-over-year.

Overall, the market reaction to Version 9 of our traffic management product and, in particular TMOS®, our Traffic Management Operating System, has been very positive.

That, combined with continued strength of our iControl partnerships, which helped drive almost 50% of our product revenue in the quarter and the increasing sophistication of our iRules application development capability, have insured our continued success--successful penetration into larger enterprise accounts and service providers.

We also announced an agreement to acquire Swan Labs in early September and you're probably aware the transaction closed in the first week of October.

This is very significant as we enter FY '06 for several reasons.

Apart from increasing an addressable market, Swan's best-of-breed WAN optimization and application acceleration solutions fit perfectly into our vision of providing solutions with the intelligence that drives the network.

Networks are built to carry traffic, not to handle application issues.

Applications may not work well on every network and not all network--networks, such as the internet or mobile networks, are under our customer's direct control at the application level.

F5 products are strategically located between applications and users.

We are intelligence, manageability and application security to the network, and allow applications to do what they are designed to do.

As we move into FY '06, we do TMOS® as a single control point for the delivery of application-level intelligence.

Through TMOS®, we control and manage the three years of application delivery networking; application security, application optimization, and application availability.

Hopefully you saw our recent product announcement on the availability of TrafficShield® as a software module on TMOS®, yet another prove point on the power of the TMOS® capability.

As I say that the announcement of the Swan Labs acquisition, we also aim to have the optimization and acceleration products running on TMOS® in the future.

We believe this is a highly differentiated strategy.

As far as Q4 is concerned, I'm extremely pleased with our performance.

Revenue and sales bookings across our major geographies were equal to or better than our expectations.

We saw strong performance in Japan at the financial half-year close.

EMEA was pretty much flat over the previous quarter, due to seasonality.

Asia-Pacific has been strong business-flow in the quarter, and taking into account the increase in backlog, we saw solid sequential growth in both U.S. enterprise and federal business.

I was also pleased with the progress of our security business in Q4, especially with sales of TrafficShield® running on TMOS®.

Although we formally announced TrafficShield® on TMOS® in October, we actually took orders for the solution towards the end of September.

Looking forward to Q1 and fiscal 2006, I believe F5 has a number of reasons to be confident in our prospects for continued growth in revenue and earnings.

By now you may have seen our press announcement today regarding the pr--promotion of John Rodriguez as Senior VP and Chief Accounting Officer and Andy Reinland as Senior VP and Chief Finance Officer.

After a very conferen--comprehensive external search, where we interviewed approximately 25 candidates, the board of directors agreed with my recommendation to promote Andy and John.

They have been key contributors to F5 success over the last few years, and I am delighted to welcome them to the exec team reporting directly to me.

The sales prospect pipeline is at its highest level in our ma--in all our major geographies, and we expect to see growth in each geography in FY '06.

Our services business continues to grow from strength-to-strength, and we continue to experience a high service renewal rate from our customer base.

The sales revenue backlog has increased each quarter in fiscal '05, which bodes well for services growth in FY '06.

We have established TMOS® as an industry-leading platform, and the initial reaction from prospects and customers on availability of TrafficShield® on TMOS® has been very positive.

We plan to continue with this hybrid hardware/software business model in FY '06, and you should expect to see more application layer solutions becoming available as a software module.

In addition, we have a very exciting system platform road map, which we will go through in some detail at our analyst/investor meeting in New York on November the first.

Our strategy of market expansion into adjacent markets, which started with our FirePass® and TrafficShield® security products, continues with the addition of the Swan Labs WAN optimization and acceleration products.

We would expect security to continue to grow in FY '06, and clearly the WAN optimization market is an exciting new opportunity for the Company.

So in summary, given the host of opportunities available to us, I believe F5 is well positioned for continued growth, as we move into fiscal 2006.

I want to take this opportunity of thanking the entire F5 team and their partners for their efforts and support and with that, will ho--hand the call over for Q&A.

Q&A please.

Thank you. [OPERATOR INSTRUCTIONS] Alex Henderson from Citigroup, you may ask your question.

Great, thanks.

Can you hear me?

Yes.

So a couple of questions.

First off, there was a lot of noise during the quarter that there was actions taken by Cisco that were intended to disrupt sales in the channel and slow the adoption of your technology in anticipation of them eventually coming out with a product.

First off, did you see that?

Second, to what extent do you think that Cisco was taking actions of that sort to actually disrupt the marketplace?

How did that impact you?

You know, we didn't see any impact at all from that.

Obviously, we got some questions on it, but we didn't see anything at all.

Just a general answer from the competitive landscape.

Frankly, last quarter was pretty similar to previous quarters and we haven't seen any--any real change in Cisco's competitive position.

We certainly haven't seen any different reaction from our [network] of customers and a succe--our success rate has still been very high.

Regarding Juniper, we tend to see them in the SSL VPN space pretty aggressively, but nowhere else.

And the Citrix® Netscaler, we seem them in a very, very similar profile to the profile that we saw when Netscaler was private.

So just generally speaking, as far as you can tell, there's been no impact of all of the announcements by Juniper, Citrix®, Cisco, and all that in terms of negatively impacting your business.

But on the other side of the coin, have you seen any positive impact?

That's demonstrated in the numbers.

So it's helping because of their--Cisco's approval of the concept?

Well, who knows?

I mean, if it's pervading more awareness, that's great.

I think it'd be a push to say it's helping right now, because it's only one quarter of it, but we haven't seen much change, Alex.

Second question, can you talk a little bit about what you are doing on the distribution front to expand your footprint?

You mean in terms of channel partners, et cetera?

Well, channel reach, channel partner, scale and breadth of your distribution.

Yes, we've--a couple of things, I'll let Tom Hull talk, as well.

But we've added--added some distributors, we've added some partners, not aggressively, actually, as other quarters, sort of in the single-digit range.

The main focus we've had is very much on--in terms of leveraging the existing channel, but, Tom, you might want to --

Yes, I mean we are spending an ordinance amount of time working with the existing channels we have and, obviously, in Q4 really we're focusing on closing out the year.

We think we've got a tremendous amount of mileage to be gained from our existing partner base and really driving additional technical expertise with them, as they take our product to market.

So we've been more focused on really upscaling our partners.

We are obviously still expanding, but in relatively small numbers.

Last quarter, we only added two gold partners, but on a worldwide basis, have approximately 450 partners out selling our products, both partners and distributors.

The other thing we've been doing, is Tom's organization has been hiring, actually pretty aggressively during the year, both in presales at support end and quota carrying heads, as well, and also we've been hiring in the--focusing on the service provider space, as well as hiring channel partners.

Great.

Congratulations on the promotions, guys.

Oh, thanks.

Next question is from Matt Robinson.

Please state your company name.

It's Ferris, Baker Watts.

I was wondering, you mentioned interesting statistics on iControl and how it drives revenue.

I was wondering how you quantify that, and also if you could comment on DevCentral, the number of customers that are subscribing to DevCentral now and how it compares to the recent past?

Sir, this is Dan Matte.

As far as the iControl implements piece, the way that we track that is simply by having our channel and our sales force group report which of the deals are influenced by it, so we're calculating a percentage of revenue at the end of the quarter.

So when we're looking at things that are driving that and driving that change, really there's just been a tremendous amount of activity with the various application vendors.

Take Microsoft as an example, some of the things that have been going on with Windows Terminal Server or Live Communications Server or Visual Studio.net or the Sequel Group, Oracle, Enterprise Manager, things have been going on there, their e-Business Suite.

Just a tremendous number of things have occurred based on the work that we've been doing with those two vendors, as well as others out in the marketplace, really have been influencing it.

As far as the DevCentral piece goes, been chugging along quite nicely.

Actually, we revamped things about a month ago in conjunction with Microsoft Professional Developers Conference that occurred in Los Angeles.

Right now, we're standing at about 5,700 registered members, and our registration rate continues to increase over time.

So, as does the activity on the forums.

So that number, if I remember right, is about 4,000 three months ago, wasn't it?

Yes, I can't remember the exact number off the top of my head, but probably in that neighborhood, yes.

And the 50% for iControl, has that been the same for a few quarters?

That's actually a jump this quarter.

It's been in the 40s and we saw it pretty strong this quarter.

Microsoft, in particular, is very strong.

Is it--do you get a similar measurement for the influence of iRules or it pretty much track with iControl?

That's a tough one, and the reason it's a tough one is a lot of our customers now using iRules.

If you wanted to guess, and trust me, this could be wrong, but it would be the high 80s, maybe low 90s.

Wow.

Okay.

And congratulations on the quarter.

John and Andy, congratulations to you guys, as well.

Thank you.

Next question comes from Ryan Hutchinson.

Please state your company name.

W. Hambrecht.

Good afternoon, guys.

Congrats.

Just a couple quick questions here on the geographic breakdown.

In the past you've given specifics--specifics around Japan, Asia and EMEA.

Do you have those numbers available?

Yes, we do.

EMEA was 16% this quarter, APAC was at 11%, and Japan increased to 14%.

Okay, and if I'm doing my math here, looks like domestic revenues sequentially up 2%.

Is that right?

Yes.

Okay, and do you expect that to accelerate here in Q4?

Well, yes, we do, because, remember, we said in both--both of the initial communications from Andy and myself that North America enterprise business, the actual bookings were up and most of that was in backlog, so that obviously will flow into this quarter.

Okay, great.

And then the BIG-IP® revenue, in the past you've given percentage of overall traffic management revenue.

Did you give that on the call?

We didn't, but it was I think, app --

Hold on.

Yes, just a second.

I'll tell you what, we'll get back to you on that.

Okay, and then just maybe one addition.

The breakout between FirePass® and TrafficShield®.

Yes.

The--do you have the exact numbers?

Yes.

Let me give--give you a rough number this.

This is pretty approximate.

So FirePass® was pretty much flat with last quarter.

Now, having said that, we continue to see a strong pipeline in FirePass® and we've actually got some pretty big deals on the go that, if we can fill them in this quarter, it should look pretty--pretty nice.

But we feel good about the deals that are on the go, so we've seen the deal profile growing and we expect the business to increase as we move into FY '06.

TrafficShield® was just over 1.5 million, between 1.6 and 1.7 million, so it was up really nicely.

That was most of the growth in security.

Okay.

So-- 8.7 total.

I got it.

Okay.

Thanks, guys.

That's it?

Yes.

Thank you.

Stanley [Covler], your line is open.

Please state your company name.

It's Merrill Lynch.

Good afternoon.

Just a few questions.

I think in the past you've given us the percentage of revenue that you got from telecoms and if we can get within the U.S. and, in general, the federal percentage and I have a follow-up.

Yes.

Sure.

This is Dan.

As far as the telecom goes, 18%, which is about the same as last quarter, and federal government for U.S. is 7% and all governments worldwide would have been about 10.

Great, thanks.

And if I look out into '06, more of a high level pic-- high level question here, where do you think the growth, you know, more specifically by vertical, is going to come from?

Are you expecting maybe stronger penetration or an increase in revenue from the telecoms, or are you just targeting--well, not just, but mainly targeting the enterprises, as a whole?

First of all, we've got two prongs of attack on that question.

We have started building a specific focus in the field on service providers.

So we've done that.

So I would expect that to be a fruit.

We think we have a--in fact, we reviewed it actually in some detail yesterday, and that looks pretty exciting for this year that’s coming.

I'm not going to give you any predicted percentages, but that definitely is a growth area and we'll probably, because of the law of small numbers, grow faster than the basic enterprise business.

Now, having said that, our bread and butter is the enterprise business and I think our strategy with TMOS® and the integration of security and traffic management, you'll see us getting more and more penetrated into those accounts, along with becoming prepared supplier, that type of status.

So, we expect that business to grow as well, but definitely service provider.

It is [indiscernible] 3G, IPTV, stuff like that, voice-over IP, definitely exciting for us.

But we're not going to give guidance regarding expectations.

And the other area that's a substantial one that's in very early days is more of a--it's not quite a vertical in the business sense, but it's vertical from a technology perspective, is if you look at the whole WAN optimization space and even areas like storage could be good for us in the future.

Great, thank you.

Thank you.

Our next question comes from Erik Suppiger.

Your line is open.

Please state your company name.

Pacific Growth Equities.

Good afternoon.

Good afternoon.

First off, can you comment what contribution you're anticipating from Swan in the guidance that you gave for the fourth--for the December quarter?

Yes, that's not our policy to do that, Erik.

What we said--we said when this when we did the call on the acquisition, we're not going give quarterly guidance.

We will do is report on the Swan numbers as we move forward.

Having said that, we are taking a pretty conservative view and the reason for that is, well, is a number of reasons.

First of all, we actually only started selling it through the F5 system in the last couple of days.

So throughout October, we've been getting it into our processes and our systems.

We're also--quite frankly, our number one focus this quarter is support.

The-- we think the acquisition's a great one and we've had some sa-- brought some sales people along, great technology.

But frankly, the support basis is still pretty thin, and that's something that we need to build very quickly, so we can keep the quality and the support up to our customer's expectations.

That's really our biggest focus this quarter.

The reaction from customers and partners has been awesome, to the point where--we've been training some partners, but we're actually holding back on that until we move into January.

Okay, and then just to be clear, I think you'd given guidance, did you say that operating margins going forward would be consistent or gross margins?

We say gross margins will be consistent.

And then did you [Multiple Speakers] revisit your guidance for operating margins --

Operating margin, what we said there was that obviously we--we delivered 31%, if you take our expenses of options last quarter.

We did say that, in this current quarter, expect dilution to operating margins because of the Swan acquisition.

We didn't state specifically, but that's what we said, so you should expect that.

Then as we move forward on a more stable basis, after this quarter, we think we're going to be in the low 30s.

Low 30s.

Book to bill is greater than one?

Yes.

Okay.

Then last question, just Japan, can you just comment as to whether you think--I think you're growing 25, 30% year-over-year.

Is that a reasonable growth rate for that region?

Is that something we could anticipate going forward?

Yes, I think--I mean we don't talk about it.

I'm not giving you guidance for fiscal '06, but if you look at what we've been doing on a quarterly basis, it's been in that type of range.

We felt great, by the way of the Japan quarter.

It was an awesome quarter.

There were concerns about the seasonality of the previous quarter, but it rebounded strongly, so there's definitely growth in that, and that is probably in that area, yeah.

Very good.

Thank you.

Next question comes from Brent Bracelin.

Your line is open.

Please state your company name.

Pacific Crest Securities.

Thank you.

John, clearly the results here speak for themselves, but did have a couple questions.

One, did you give us what the telecom service provider mix was in the quarter?

I think that was bouncing around the 18, 19% mix last couple quarters.

That's consistent with this quarter, 18%, this past quarter.

18% this past quarter.

Perfect.

Secondarily, if you look at the overall kind of BIG-IP® business backing up security, it does look like we saw a reacceleration in sequential growth there, up 9% sequentially.

Arguably, a quarter where there were a lot of concerns about competition and diversity of new products.

Could you talk a little bit about what is driving that reacceleration and interest in the BIG-IP® platforms?

Obviously the Version 9 has been out there for a while.

Is it larger deals that are coming through?

What's really driving the growth here?

Well, it's a lot of things.

You'll notice in my introduction, I talked about TMOS® a lot, and that wasn't by accident.

We're just so excited about TMOS®.

TMOS® wasn't just a new product, it was a new architecture.

We get TrafficShield® now running in TMOS® is added security, is it traffic management?

We're going to discuss that stuff in November 1, which I think will be interesting.

But fundamentally, application delivery networking, which is where we're in, we believe, is a pretty, pretty strong growth area, and with TMOS®, we think we've got a differentiated strategy and technology leadership.

You know, you-- we talk about iControl, don't forget that stuff. iRules and DevCentral®.

That whole application focus, we think we've got massive leadership and it's a great market.

Sure, and are you seeing--I know last quarter you talked a little an increase in average deal size.

Are you seeing a continuation of those trends?

Actually, our ASP's have been pretty consistent with last quarter, so we did see that--the uptick that we talked about last quarter, and it's remained consistent.

Consistent went last quarter.

Then, John, you talked a little bit about Microsoft, specifically citing Microsoft as a driver there on the iControl side of the business.

It does look like that was a pretty material jump sequentially from the prior quarter contribution.

I know it's kind of a rough estimate how you get to that.

Could you give us a little more information as far as what the big driver there with Microsoft was?

Was it just more momentum on the dot net side or what drove that if he specific Microsoft-related iControl business in the quarter?

Brent, this is Dan.

It was pretty balanced across many things.

I guess to summarize it, it was really the momentum that we're seeing from the investment that we've made over time with the various product groups there.

So whether it's the Terminal Server group, the Life Communications Server group, the IS group, you know, I can go on and on, presence in the demonstration centers worldwide with Microsoft, in all the labs, the dot net piece.

There are just a tremendous number of things that contribute to the growth that we're seeing being driven by Microsoft.

Perfect.

Sounds like it's not really one isolated thing.

It's kind of firing all cylinders.

Very balanced.

Great.

Thank you very much.

Our next question comes from Ken Muth.

Your line is open.

Please state your company name.

Hi.

Ken Muth at Robert Baird.

The federal business, you talked about you saw growth there, do you think that was some what of a seasonal uptick in business, given the federal fiscal year end or do you see that sustainable in December?

It's definitely seasonality, effectively budget being spent, associated with that, so we expect it to become a pretty reasonable federal business this coming quarter, but we do expect it to be down a little bit over Q4.

And then a quick follow-up on the deferred revenue, slightly down this quarter, just as a fiscal year end.

Any reason behind that?

You talked about the strong bookings, but anything with a deferred revenue line you can comment on?

Yes, mainly in the service area and Julian can talk on that.

The growth in deferred revenue wasn't quite as fast as the previous two quarters.

Those two were quite unusual in that we've managed to close a number of early renewals and also close a number of multiyear contracts.

Q4 we didn't manage to do that to quite the same degree, but what it does mean for Q1 is we have our largest renewal opportunity ever, and we've seen a large number of those deals closed already.

Great.

Thank you very much.

[OPERATOR INSTRUCTIONS]

Well, wow, this is probably one of the shortest we've had.

So I guess if there's no more questions, if you're going to be in--at the deal we've got going on November the first, we look forward to seeing you.

I think it will be a pretty interesting day.

If not, go to the webcast and check to out.

So thanks a lot and talk to you next quarter.

This does conclude the conference call.

You may disconnect at this time.