F5 Inc (FFIV) 2007 Q2 法說會逐字稿

Welcome to F5 second quarter financial results.

(OPERATOR INSTRUCTIONS) 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.

Welcome to our second quarter 2007 conference call.

Speakers on today's call are John McAdam, President and CEO; 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; Karl Triebes, Senior VP of Product Development and CTO are also with us to answer questions following our prepared comments.

If you don't have a copy of today's press release, it's available on our website www.F5.com.

In addition, you can access an archived version of today's live webcast.

On the event calendar page of our website through July 25.

4:30 p.m.

today, until 7 p.m.

Pacific time tomorrow, you can also listen to a telephone replay at 800-876-5573 or 402-220-5329.

During today's call our discussion will contain forward-looking statements which include words such as believe, anticipate, expect, and target.

These forward-looking statements involve risks and uncertainties and may cause our actual results to differ materially from those expressed or implied by these statements.

Factors that may affect our results are summarized in our quarterly press release, described in detail in our SEC filings.

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

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

Now I would like to turn the call over to Andy Reinland.

Thank you, John.

Revenue and EPS for the second quarter of fiscal 2007 were above the guidance we provided in our release and conference call on January 24.

Driven by sales of our core application delivery networking products, we achieved revenue of $127.6 million, above our target range of 124 to $126 million.

GAAP EPS of $0.47 per diluted share was also above our guidance of $0.44 to $0.46 per share.

Overall, revenue grew $7.6 million just over 6% from the prior quarter.

Year-over-year revenue was up $33.5 million, or 36%.

The Americas represented 58% of revenue.

EMEA accounted for 17%.

Japan 12% and APAC 13%.

Product revenue of $96.1 million represented 75% of total revenue.

Service revenue of $31.5 million was 25%.

Revenue from our core business was $117.1 million or 92% of total revenue, representing 8% growth over the prior quarter.

Security revenue was $8.6 million, which was below our expectations.

This included $2.1 million from our applications security manager products and $6.5 million from our SSL VPN products.

WAN optimization and acceleration revenue was $1.9 million.

The telco vertical increased sequentially to 23% of our business.

Sales within the financial sector was 19%.

U.S.

Federal Government generated 5% and total government was 10%.

During Q2, we had two greater than 10% distributors, Ingram Micro which accounted for 12.9% of total revenue and Avnet Technologies which accounted for 13.3%.

Our book-to-bill ratio for the quarter was less than one.

As a reminder for my remarks on margins, expenses, and earnings, all results and guidance discussed are GAAP based unless specifically defined otherwise.

We have provided a breakout of stock-based compensation expense, by function in today's earnings release.

Gross margin in Q2 was 77.4%.

Operating expenses of $73.1 million were within our target range of 70.5 to $73.5 million.

Our operating margin was 20.1%.

Our non-GAAP operating margin, which excludes stock-based compensation expense, was 29.3%.

Our effective tax rate was 39.3%, excluding stock-based compensation expense, our non-GAAP effective tax rate would have been 34.5%.

On the balance sheet, accounts receivable DSO ended the period at 52 days.

Inventories at quarter end were $7.9 million, reflecting continued strength in our services business, deferred revenue increased 10% sequentially to $75.2 million.

Cash flow from operations was $37 million.

This result was net of $18 million in estimated tax payments, which we began paying in Q2.

We ended the quarter with $586 million in cash and investments.

Capital expenditures for the quarter were $4.5 million and depreciation and amortization expense was $3.8 million.

During Q2, we added approximately 125 employees, ending the quarter with 1280 full-time employees.

Moving on to the third quarter outlook, we are targeting revenue in the range of 131 to $133 million.

We expect gross margin in the 77 to 78% range, including approximately $500,000 in stock-based compensation expense.

We expect operating expenses between $73 and $76 million, including approximately $10 million of stock-based compensation expense.

Our effective tax rate going forward is estimated to be 39%.

Excluding stock-based compensation, we expect our non-GAAP effective tax rate to be 34.5%.

Our earnings per share is expected to be within a range of $0.48 to $0.50 per share.

We are continuing to invest in the growth of the business and plan to add 60 to 80 employees this quarter.

We estimate DSOs will be at or around 50 days.

We expect inventory levels within a range of 7 to $9 million and we believe our cash flow from operations will be in excess of $35 million.

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

Thanks, Andy and good afternoon, everyone.

Q2 marks our 17th consecutive quarter of sequential growth.

Overall, I was pleased with our performance, especially in our core application delivery controller market, where we continued to see solid sequential growth.

From a geography perspective, the performance was balanced across the major geographies was revenue up sequentially across all the major regions.

Our service business yet again produced solid growth with another large increase in deferred revenue.

We also continued to see growing demand for our services consulting business, which we expect will continue in the second half of this year and into fiscal 2008.

After a couple of quarters of sequential growth with FirePass, we saw a sequential decline last quarter, which was pretty much across most of the main geographies.

Historically the FirePass business has been somewhat lumpy and last quarter's results again demonstrated that characteristic.

We do not believe the competitive landscape has changed in any material way and we do see some large opportunities for FirePass in this coming quarter.

Our WAN optimization business was also going sequentially in quarter two.

We remain very focused on our product road map plans to move the WANJet solution on to a TMOS platform with a target delivery date during summer this year.

We continue to believe that TMOS, along with iControl and iRolls gives us significant competitive advantage as demonstrated by our clear leadership in the application delivery controller market.

And we intend to leverage that advantage and adjacent one optimization in the market.

We launched a number of very exciting marketing and product initiatives last quarter, including the introduction of a new high-end flagship 8800 platform.

We believe the 8800 has no viable direct competitor in the market today and we have already seen high interest for the product from the large enterprises, large service providers and the very large Internet companies.

Internet traffic continues to grow dramatically in both volume and complexity.

A trend that will no doubt continue for the foreseeable future.

We also launched two very significant initiatives with Microsoft during the quarter.

A joint F5 Microsoft announcement regarding our OEM relationship for Microsoft System Center Operation Manager 2007, with will enable F5 to deliver and apply end control point, to monitor and report and overall help of our customers' applications delivery infrastructure.

We also announced our F5 application ready network for Microsoft.

This is the first application delivery network campaign specifically designed for Microsoft.

It contains prescriptive architectures, designs, application, and deployment gates all which utilize entire F5 product portfolio.

These solutions optimize Exchange 2007 SharePoint 2007 and Vista applications.

The benefits of utilizing the F5 application ready network architecture include up to 2.5 times faster application performance, 33% shorter deployment cycles, up to 70% reduction of access control costs, up to 70% reduction in bandwidth utilization and five lines availability for critical network and application resources.

We have plans in place to run road shows to introduce the F5 application ready network in various cities in North America this quarter and then follow up with similar events EMEA, Japan, and APAC throughout the year.

We also intend to expand this approach to our own measure application partners in the future.

Our current road map remains in very good shape.

We remain on target for introducing WANJet on TMOS this summer.

And we continue to work on a similar project with FirePass.

Also, Montreal Chassis-based solution is progressing well and remains on track for the end of this calendar year.

We believe our current leadership with TMOS and our current platform portfolio gives us a strong competitive advantage and combined with our road map, we believe we will maintain and increase that advantage going into fiscal 2008.

Regarding outlook, as far as Q3 is concerned, Andy indicated that we continue to target sequential growth in our overall business.

Our CrossPack pipeline remains strong and all our major regions, with the exception of Japan are forecasting solid sequential growth in Q3.

Of course, Japan tends to be down this quarter as they enter their new financial year and we expect our Japan business to be up strongly again in Q4.

We remain committed to our growth strategy.

We add 125 people to the F5 team last quarter, bringing the total number of new hires to 210 in the first half of fiscal 2007.

This includes an increase to our sales infrastructure head count, bringing it to 425 in total at quarter end.

We anticipate that the majority of new sales hires in the first half will start to ramp this quarter, accelerate in quarter four and achieve dual productivity in the first half of fiscal 2008.

In the meantime, we intend to continue hiring across the board to take advantage of the growth opportunities we see in our key markets.

I would like to thank the entire F5 team and our partners for their efforts in Q2 and with that, we will hand the call over for Q&A.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Troy Jensen.

Your line is open.

Please state your company name and you may ask your question.

Piper Jaffray.

Congrats on the nice quarter, gentlemen.

Thank you.

A quick question, BIG-IP 8800, was that --could you share whether or not that was generating revenues for you in the -- during the March quarter.

Yes, it did.

We won't as we've done in the past actually indicate a specific revenue by product but we absolutely shipped and took revenue on it last quarter.

Was it primarily just beta sites that converted?

No.

No.

It was a combination of some beta, but also, some the larger customers I mentioned in my script.

Okay.

Two questions quickly for Andy.

Andy, you mentioned book-to-bill was below 1 in the quarter; is that correct.

Yes.

Any way you guys could maybe quantify how close to 1 it was?

Yes, let me do that, Troy.

We don't give specifics until we report at the end of the year, but just to give you a feel for it, as the book-to-bill was 1, was equal to 1, we would have been within our range of guidance of 124 to 126.

Got you.

Okay.

That's very clear.

And then the last question, you guys talked, about operating margins in the high 20% range.

It looks like right now, if my math is correct, pro forma is 29.3.

Given that the head count hiring sounds like it is going to decelerate a little bit, do you think we are roughly at the low point of the margins?

I think if you look at the guidance as it's sized up for Q3, you will kind of see that we expect it to stay in that range for Q3.

And I wouldn't look to the head count numbers as anything other than looking at our expectations today, given the hiring we have today, integrating them into the organization.

That's the number that we can see fitting in nicely for Q3 and as we always say, we will reevaluate it and reassess and adjust as the numbers play out.

Understood.

Keep up the good work, guys.

Thank you.

Paul Mansky, your line is open.

Please state your company name and you may ask your question.

Yes, it's Citigroup.

On the WAN optimization front, obviously, we heard from one of your major competitors there recently putting up some pretty decent growth numbers.

On that tough sequential growth number, how much of that do you attribute to just market conditions, competitive conditions, and then your own product cycle upcoming.

I would call hugely on our own product cycle.

We have been very open about the WAN optimization market, actually since the beginning of the fiscal.

We think, first of all the market is pretty (Expletive) vibrant, the good news.

The bad news from our perspective in the short term is that we do believe we've got some competitive functionality missing that we are aggressively putting into the product, namely some management features and some discounting, in particular.

That gets fixed with our TMOS release, which is the one that's scheduled for summer I'd say that is on track.

Then we expect to (Inaudible) as a bigger plea on that market.

Great thank you.

Congratulations again on the quarter.

Thank you.

Thank you.

Matt Robison your line is open.

Please state your company name and you may ask your question.

My usual question about data central users, how that's going?

Sure, Bob.

This is Dan.

We are up at about 15,300.

That's about 2,000 adds, right?

Correct.

So that sounds like that's the most you have ever had; am I correct there?

It is, that's an all-time high in terms of adds and the other metrics that we look at as well, are all very, very positive.

During the quarter we actually launched Net Central Version 4 where we leveraged a lot of web 2.0-type technology for Net Central and we've seen that very, very positively received by the community.

Okay.

Thanks.

That's it for me.

Thank you.

[Tel Rinani] your line is open.

Please state your company name.

You may ask your question.

(Inaudible) we're calling in for Tel, Merrill Lynch is the company name.

Just a question on, again, towards the end of the quarter and looking at the book-to-bill, I'm just wondering if there was anything that you maybe care to clarify.

There's a lot of chatter or noise in the market about some of the things going on, potentially wondering where you think that stems from.

And I have a quick follow-up after that.

And I'm not sure what you mean by chatter over things going on.

We don't normally hear that.

But just as some feel for it.

We did about 50% when we allocate.

Yes.

So that was pretty normal from a quarter basis.

So not much difference there.

We did see some seasonality.

We did see some of that, but, again, that wasn't entirely unexpected.

I'm not quite sure what -- what the question means.

Okay.

No, I think that's fair related to seasonality.

If I look at the guidance number, it seems like the outlook in terms of what folks in general were assuming in terms of a dollar level of growth, you are at the midpoint keeping that maybe 5 million or so growth rate.

I'm just wondering where some of the reservations are in terms of maybe -- the range that you are giving is fairly tight 131 to 133, what -- what could lead maybe to the lower end of that and the higher end, maybe you could talk about those factors.

We normally give a range of about 2 million, that's a norm that we do that.

So it isn't any tighter than we would normally do.

In terms of the guidance we do the same system that we have done in the last more than four years.

We look at the pipeline, we look at the bottoms up forecast, et cetera, et cetera, and that's the number we come up with.

in terms of some of the things that's ongoing that's related to that.

We do expect, as I said in the call, Japan to be down this quarter, there is nothing unexpected about that.

It's the beginning of their financial year.

The other thing that's worth mentioning is that given that our book-to-bill was less than one in last quarter, the bookings this quarter to get into the revenue range will actually be greater than the actual revenue.

So from that perspective, the sales booking is slightly more aggressive than our revenue range.

That's very helpful.

Thank you very much.

Thank you.

Ryan Hutchinson, your line is open.

Please state your company name and you may ask your question.

WR Hambrecht.

Just a couple of questions here, just in terms of the distribution strategy in place.

Were there any changes in the quarter specifically with Avnet and GEX, or should we expect anything moving forward and then maybe touch on the Westcon relationship as well.

This is Tom Hull.

There weren't any major changes other than Westcon coming on board.

So, we are proceeding with our strategy, continuing to invest in our existing partners and looking for opportunities to expand.

But from a distribution standpoint, no major changes.

Okay.

Great.

And then in terms of Montreal, at the end of the calendar year, is that up slightly from prior targets?

Hi, this is Karl.

In terms of delivery, no it's pretty much the same as what we communicated in February.

So it's on track for that.

Finally, just in terms of the acquisition strategy for the Company, how should we look at that?

Has there been any changes there?

No, I wouldn't consider any changes from a continuing strategy.

Would we long for more technology tuck-ins or are you guys pretty content on where we sit today?

I think where we sit today we have a lot on our plate organically.

We always say never say never to these types of questions because we continue to look at what's available in our adjacent markets but from a -- in terms of where we sit today, we have a lot on our plate.

That's it for me.

Thanks guys.

Thank you.

Ehud Gelblum, your line is open.

Please state your company name and you may ask your question.

It's Kim Watkins in for Ehud.

Just a question starting off on security.

You mentioned no change to the competitive outlook.

Did you see any changes to the pricing environment, or are there -- is it in terms of seasonality.

If you could touch on that a little bit further.

No, we didn't.

We basically, I think seasonality definitely plays a part.

I've seen a number of times in previous calls, we think the secure remote access market is a great market but from a mission critical perspective, it's not as mission critical typically as a core big IP market.

So it's easier to delay to decisions which would lead to some seasonality.

I also noticed in one of our competitors conference calls recently that they talked about SSL VPN not being so hot last quarter as well, which would be in line with why we have not seen any major material change in the competitiveness.

Okay.

And then your services business definitely seems to be growing quite a bit faster than the product business.

How -- do you expect that to continue indefinitely and how much of that at this point is from consulting services, as opposed to maintenance contracts?

Yes, it has been growing strongly and the business really, as it's evolved on top of layering of the install base, we have seen our deferred revenue grow very well so we're happy to see that.

In terms of consulting which, we have talked a lot about investing back in the business that consulting was an area that a lot of our customer base has been asking for, we have been adding consultants, probably four to eight a quarter and our customers are very happy about that.

We see the revenue going up from there.

We are not going to break it out for you.

But we did see a pretty significant ramp up.

Also training has done very well.

That also contributed to the increase that we saw this quarter.

And from our perspective, seeing that training going up, that's investing back in the business and establishing ourselves for long-term growth.

So we are very happy with it.

Do you expect the services business to continue to grow a little bit faster pace than products?

Definitely the consulting we expect to continue to grow, as well as the training.

Okay.

And then the last question is on hiring it sounds like next quarter again pretty robust hiring.

Although down from last quarter obviously.

What is the end goal here?

Do you guys have a magic number in your head in terms of where you want to get to?

Should we -- if not a number, should we expect you will continue to hire for the remainder of year?

Yes.

And we don't have an end goal -- a specific end goal.

Basically what we are looking at is what we believe the market opportunity is, what sales productivity.

We spend a lot of time internally on that.

We can get as we assimilate the sales organization into the field.

Obviously, we hire aggressively in product development to maintain technology leadership and then in service to provide customer satisfaction and quality.

But the key thing that we're looking at is growth potential.

Now, we are not going to give numbers out for what we expect to do in quarter four, but we would absolutely expect to continue to be hiring as we move into the fiscal.

Great.

Thank you.

Thank you.

Joanna Makris, please state your company name and you may ask your question.

Hi.

Canaccord Adams.

I'm wondering if you could talk a little bit about the general outlook for the 8800, it's newly out of the box, if you could comment perhaps on what you are seeing in terms of order activity and any -- how we should think about expectations on that product line for the year.

Yes, I will mention it quickly and then Karl or Dan can also add.

We are very excited about the 8800 and actually probably more excited about the trends.

When we talked to the large service providers, the large customers, the large Internet companies, the statistics on web complexity and traffic growth is reality pretty amazing.

So we have gone from a market where functionality was everything, to now functionality is everything as long as you have got tremendous performance.

As I said in the script there's no competitor at least at these performance levels.

We think we can absolutely break into the real big opportunities here with this product.

And we are already doing that but we think that is going to continue.

And, of course, that bodes well for Montreal as well.

Dan, do you want to add anything?

That covers it.

Thank you.

[Bill Choi] your line is open.

This is [Monja Chow] for Bill Choi with Jefferies & Companies.

A couple of questions, one, average deal size in the quarter?

It was pretty consistent last quarter so around 160,000.

Okay.

And could you just comment on sales cycles in terms of, what are you seeing out there.

Are people taking longer time to value the products or just shortening--?

We're not seeing any change in sales cycles.

So we basically have -- our sales cycles probably in the three months, we do see sales in the quarter that start and end in the quarter and then we see some longer ones that tend to be the bigger ones as well, but no major change whatsoever.

All right.

Thanks a lot.

Yes.

Thank you.

Tim Long, please state your company name and you may ask your question.

This is [Jeff Lueber] dialing in for Tim Long.

A couple of questions.

First, it looks like you are hiring at a slightly lower pace.

Is that due to the mission returns on new hires and should we expect that pace to decline going forward?

No, the caps, as Andy said earlier, really is linked to the assimilation.

We have hired a lot of people in the last couple of quarters.

We are going to keep that going as we move into this quarter, maybe slightly less as we indicated than the previous quarter, but when you look at the percentage of hires, it's pretty significant.

I don't see it slowing as we move into quarter four, but we haven't given specifics on that.

So in terms of the opportunity, things still look just as good as they did three months ago and maybe six months ago.

I think we are going to see some aggressive hiring continuing.

And then on the service provider business, pretty strong this quarter.

Can you talk about what drove the strength there.

Was it the result of new hires?

Was it the availability of the 8400 and now the 8800?

And then the final question is on legal expense due to options.

How much was there this quarter and should that be going away next quarter.

Yes, I will answer that first.

This was about $300,000 in legal fees related to options.

Next quarter, it's -- it could be as much as the same.

We're really in an uncertain stage with that, but I wouldn't expect it to be any more.

Okay.

Jeff, this is Dan.

As far as the service provider category and the strength, it was again quite balanced across a number of different areas, implementations and fixed environments, mobile environments, hosting ISPs, everything was really, really strong.

I don't know that we could link it directly to a particular platform, I think it was more general than that.

I think it was people exploiting the capabilities of our platform, web mail implementation, Voice over IP, video, just a number of different things.

And then finally, I think as well, we are seeing the results of the team that we have focusing on the service provider vertical, and the results of their efforts over the past year.

Should we expect this business to trend up as a percentage of sales through the remainder of the year?

I guess what is the target level?

That's a really tough one.

I think you will see by the nature of that market, there is going to be some big deals that make it slightly lumpy over the last couple of quarters but we expect that definitely it's a big opportunity for us, but so is the enterprise so I wouldn't discount that either.

We expect to see growth in both.

I wouldn't like to call out the definites in terms of percentage.

Thanks, guys.

Congratulations.

Mark Sue, your line is open.

Hi, RBC Capital Markets.

Just back on the service provider strategies, they go to replace competitors where you feel there's enough business around the service providers.

Mark, this is Dan.

I think there's -- well, there is definitely replacement business going on out there that's driving some of the revenue that we're seeing.

The majority of the -- the majority of it is just new implementations that we are running into.

The bottom line is that there's plenty of business to go around there.

And, John, is the business becoming more seasonal in North America or was it just this current March quarter and will it be back to normal in terms of seasonality now that we are in the June quarter.

I don't know if it's becoming more seasonal, but there's definitely an element of seasonality.

Typically a North America enterprise, there's some seasonality in the first quarter.

That tends to build, to get much stronger in the current quarter.

But the big seasonality for us is usually Japan.

That's the most obvious one, along with to some degree Europe, of course, in summer.

And is the return book to bill greater than 1 at the end of this quarter.

When we've given guidance, the guidance we've given assumes a equal to 1.

I see.

Thank you, gentlemen.

Rohit Chopra, your line is open.

Please state your company name and you may ask your question.

Webbush Morgan.

Good afternoon.

I had a couple of questions.

One, I just wanted to come back to the government vertical.

I just wanted to ask you a question there.

Are you working with anyone on any large contracts with the military or possibly like the networks contract, which was announced or the upcoming enterprise contract, which will be announced soon?

And the second question comes back to WANJet.

So given that there's a number of players out there, and people are already sort of out there with a decent product, are you guys in any way worried that sort of the low hanging fruit is captured, even though we all understand that there's a big market out there.

Does it make it difficult for you or are there different plans put in place to try and capture an opportunity which may be a longer ramp or something like that?

Yes, on the first question, we are working on a number of federal contracts but we wouldn't be specific about what they are, but we -- but we do -- we are seeing the fruits of focus in federal for a number of years.

There was a reasonable quote from federal this quarter and a lot of that was linked to the big contracts, and yes, a number of them are military, but that's the only comments I will make on that.

Regarding WANJet, in a way, a quick yes to your question in a sense that if we could have it tomorrow, I would be getting Karl Triebes team to have it ready but it looks like it is going to be summer.

We still think there will be an opportunity there, no question about it.

It seems to be a pretty hot market.

I think with TMOS, we can add some real differentiation.

Yes, we would like to get it as soon as possible but it is what it is.

Okay.

Thanks, guys.

Thank you.

Manny Recarey your line is open.

Please state your company name.

Kaufman Brothers.

To follow-up on a question of the U.S.

government, do you guys have any concern about the funding aspect of -- with the Department of Defense with the things going on in D.C.

about budgeting at all?

You mean in the short term, on a quarterly basis, the long term?

No, on the short term, basically in the June quarter with the battle over the budget?

Do you have any concern about funding being delayed a quarter or so out?

Yes, I understand.

We don't -- we are not specific by vertical in terms of our forecast but it's a pretty reasonable forecast for federal this quarter.

So I guess -- you never say you are not concerned about potential budget issues but that has not come up as a major issue from the field.

Do you agree with that, Tom?

Yes, and we are involved in civilian opportunities as well with the federal.

So it's not just the defense that we are engaged in at this point.

Okay.

And as far as your hiring goes, basically, you expect to be more of the sales and marketing or R&D or both.

I think it will continue pretty evenly.

The sales and marketing will be the lead but then services and R&D.

And then the last question, the share count seems to be flat quarter over quarter.

Is that a fair expectation?

Why -- was it flat this period?

Really, I think it was primarily driven by share price and the calculation for full dilution there.

When we model out, we usually model an increase of about 0.5 million shares a quarter but over time, we have seen that to be about the average rise.

Okay.

Thanks.

Samuel Wilson, your line is open.

Please state your company name and you may ask your question.

Sure.

This is Jonathan Curtis for Sam from JMP Securities.

Quick question on your core markets.

Are you seeing more or less of Citrix, Juniper and foundries from the big IP space?

Yes, I will talk and maybe Dan will add.

Yes, we see fiscal all the time because we are selling into it.

So they are obviously number one.

Citrix what we see, we believe our competitive differentiation has got stronger against Citrix as the quarters have unfolded here.

And then frankly we don't believe in our core market.

We have another viable competitor.

Got it.

And then just quickly CapEx for the quarter, what was it?

It was 4.5 in Q2.

4.5.

And then back on the WAN optimization stuff, are you guys actually even competing for new opportunities in that market or are you just taking in calls and selling if people come asking ut are you actually out in the market pushing the old WANJet solution?

We are pushing the WANJet solution, but in focused area.

So data center to data center.

We believe we have got some strength there.

In some of our customer base, but the sales force have got a pretty strong focus on our BIG-IP process where we have got leadership.

So most of our energy is focused there.

Now, as we get more competitive, that will change.

But that's where we placed it today.

Got it.

Good the thank you, guys.

Gabe Lowy your line is open.

Please state your company name.

Gabe Lowy with Unterberg Congratulations again, gentlemen.

Quick question concerning WANJet.

Once that gets integrated into TMOS, are you positioning it to extend the platform into the storage market?

Good question.

Yes.

So initially.

Gabe, this is Dan.

When you look at what we can do and I think you are alluding to, do you wind up distributing storage to all the different places and use the WAN optimization to be able to speed the access to those resources, spread around, I think certainly over the long term, you can see things going in that direction.

When we come out of the gate, with the product, I don't think that that will be sort of a headline that will be in there.

Okay.

Thank you.

[Cameron Cook], your line is open.

Please state your company name and you may ask your question.

[Bianco] Partners.

I was wondering if you could talk a little bit bout how WebAccelerator picked up after you guys put it on TMOS or if it did and then how that relates to WANJet and FirePass balanced against the release of Montreal.

Hi, Cameron.

This is Dan.

We have seen actually a great uptick with WebAccelerator.

That's become a module on TMOS.

Over the past quarter lots of additional activity on it, good solid pipeline.

So we have seen good results from that.

Also as people are evaluating WAN optimization for their different applications, if it's a web-based app, there are many scenarios where doing something simply at the head end makes a ton of sense and doesn't require any additional device out at the far end to have to administer in incur costs there.

In terms of balancing that against FirePass and other things, it's obviously different market segment and things are moving in different directions or at their own paces there.

Again, Montreal, I think is yet again, a different beast.

Once it's available, then we will be making WebAccelerator module on it as well and we will be able to provide people with extremely high capacity after the deployment of that capacity.

Just let me clarify.

This is Karl.

On Montreal, Montreal supports all of our version 9 software.

If a function is available as part of version 9, Montreal will be no different, side from the scalability and other things that Montreal provides.

So customers that are using WebAccelerator can then buy a Montreal and experience the scalability that Montreal gives them with WebAccelerator.

So you wouldn't expect there to be a lag when you release WANJet FirePass on TMOS waiting for the Montreal to release?

In terms of the sales growth?

We don't think so.

We think Montreal is a bill at 8800 and introduction right to the high end.

We have not seen that type of effect over the last five years so we really don't believe that's going to be a material issue.

Thank you.

Brent Bracelin, your line is open, please state your name company name.

Pacific Crest Securities.

Two questions, if I may.

First one on the Internet vertical, have you guys seen any kind of noticeable momentum, particularly with the 8800 and the new 8400.

And then John, if you could, I know we are early days with Rutherfurd, but could you compare, contrast, the Rutherfurd product cycle, what you are seeing with that and what you kind of saw with Buffalo Jump, three years ago or so.

Yes, well, first of all we definitely see an opportunity with the large Internet companies.

We actually had some successes last quarter and I think we will have some more successes this quarter.

We are pretty excited about that because they definitely need the functionality and they really need the performance as their numbers are ramping up astronomically.

The 8800 is an ideal vehicle for that.

I missed the second.

Just comparing the two different product cycles, if you could.

Obviously we are still very early days with Rutherfurd and we haven't even seen Montreal yet.

As you look at your current kind of product cycle and product road map and compare, contrast that with Buffalo Jump that's been very successful, enabling you to gain share.

How do you look at kind of the early days of Rutherfurd.

It's a tough question in the sense that it's not quite apples for apples.

In the sense that Buffalo Jump was a complete change of product line.

Rutherfurd or the 8800 is really the extension to the top of the range.

But you are right in the sense that it's giving us capability from a competitive point of view I think it's much stronger than we have ever had.

I think that plays out over the next couple of quarters and I think it does plays out in the service providers and the big Internet companies.

As you look at Rutherfurd and as you look at, the -- the existing 1 gig, Buffalo Jump products, how long do you think the market will continue to buy the 1 gig products in lieu of the 10 gig of Rutherford to platforms.

This is Dan.

I think we'll see quite a long life cycle to the 1 gig products.

Entering into the 10 gig market place, the 8400 and now the 8800, don't really see a whole bunch of people doing the -- the either/or choice between the 1 gig or the 10 gig platforms.

So they are somewhat separate.

So I don't think there's a product replacement per se going on there.

And the existence of the 8800 will not shorten the life cycle of the 1 gig products.

And my last question, really has to do with SSL.

You guys used to talk about the SSL, the offload functionality.

I think in the past you guys talked about some customers moving to this SSL everywhere kind of environment.

What is kind of SSL's role as far as driving the growth.

What is the interest level relative to some of the customers out there on the SSL side?

This is Dan again.

So we continue to see a great strong interest on uploading SSL onto the network.

That continues to drive a good, healthy portion of our sales and we see people have demanded ever increasing performance capabilities from us to make that happen.

Now, take that data point, meld it with people continuing to roll out the SSL, VPN and stretching that traffic out to the end point and then also we're getting questions from people saying, within my infrastructure, I have my wired, my wireless, and my remote people and I would like very much to be able to treat them all in the same way, using the same system, authenticate them in the same way, secure my communications in a similar fashion.

So one of the things and reasons that strings those three data points together that we are driving towards bringing our FirePass released on top of TMOS is that we believe for people to be able to really deploy this in an SSL everywhere type of deployment, they are going to need a lot of performance to make that possible on the LAN, as well as the wireless LAN and so on and so forth.

I think that we are consistent and continue to execute against that division being able to provide people with the right products to address that problem.

Okay.

Great.

Thank you.

Let's take one more question and then we'll end the call.

Thank you.

Our final question comes from [Ken Muth].

Your line is open.

Please state your company name and you may ask your question.

Hi, Robert Baird.

On the international front, could you give us any highlights of what regions were good, what regions may have not been so good?

Yes.

So Asia Pacific, pretty solid quarter.

Japan was up.

Maybe not quite up as much as it normally was, but it was up and I feel good about that.

Europe was slightly mixed.

It was strong in most of the regions, but we did see a little bit of softness in southern Europe and some softness in Germany.

Okay.

And then on the search vertical, could you give us a sense of that, U.S.

versus international.

What is the breakdown of that vertical.

No, we -- on services revenue?

No, I'm sorry, service provider.

You had great growth in the quarter.

It would be fair to say it was pretty broad spread but we don't have the breakout for it.

Okay and then last question, maybe for Tom.

Obviously it's a very hot deal market right now with seeing a lot of hiring going across a lot of verticals.

Are you see a lot of people trying to pick off F5 sales force?

Have you had any turnover there?

No more than normal.

I would say we are right in there.

We are hiring and having fairly great opportunities to hire great people in the industry.

So as we staff up, we think we are keeping our best and hiring great people.

Yes.

And the numbers that we have been giving are numbers that do take into account attrition.

When we checked the attrition, we think we are pretty much below the industry average.

Okay.

Great.

Thank you very much.

Okay.

Thank you.

That's the end of the call and thanks for coming in.

And we'll talk to you next quarter.

Thank you.

Thank you.

That concludes today's conference.

You may now disconnect from the audio portion.