F5 Inc (FFIV) 2007 Q3 法說會逐字稿

Good afternoon.

Welcome to F5 third quarter financial results.

I'll parties will be on a listen only mode until the question and answer session.

Today's call is being recorded.

If you have any objections, please disconnect.

I'd now like to turn the call over to Mr.

John Eldridge, Director of Investor Relations.

Thank you, sir, you may begin.

Thank you, Angie.

And welcome to all of you to our third quarter 2007 conference call.

The speakers on today's call are John McAdam, President and CEO; and Andy Reinland, Senior Vice President, Chief Financial Officer.

John Rodriguez, Senior VP and Chief Accounting Officer; Tom Hull, Senior VP of Worldwide Sales; Dan Matte, Senior VP of Marketing; and 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In addition, you can access an archived version of today 's live Webcast from the event calendar page of our Website through October 24.

From 4:30 p.m.

today until 7:00 p.m.

Pacific Time July 26, you can also listen to a telephone replay at 888-562-6807 or 203-369-3941.

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 that 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 release described in detail on our SEC filings.

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

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

Thanks, John.

In our fiscal third quarter we achieved revenue of $132.4 million reflecting 4% sequential growth and within our guided range of $131 million to $133 million.

Our bookings outpaced our reported revenue for the quarter.

Book-to-bill was greater than 1.

GAAP EPS of $0.51 was above the $0.48 to $0.50 guidance we provided in our release and conference call on April 25.

Before discussing detailed results for the quarter and guidance for Q4, I want to remind you that all numbers are GAAP based unless specifically identified as non-GAAP.

Overall, revenue grew $4.8 million or 4% from the prior quarter and $32.3 million or 32% from the third quarter a year ago.

The Americas represented 58% of revenue, EMEA accounted for 18% and Japan and APAC each represented 12%.

Product revenue of $97.8 million represented 74% of revenue.

Service revenue of $34.7 million was 26%.

Revenue from our core business was $121.5 million or 92% of revenue.

Security revenue was $8.9 million, including $7.2 million from our SSL VPN products and $1.7 million from our applications security manager products.

WAN optimization and acceleration revenue was $2.1 million.

The telco vertical was 22% of revenue.

Financial and technology sectors each accounted for 19%.

U.S.

Federal Government generated 6% and total government was 11%.

During Q3, we had three greater than 10% distributors.

Avnet Technologies, which accounted for 12.3%, Ingram Micro, which accounted for 11.2%, and Tech Data, which accounted for 10.1%.

Moving down the income statement.

Gross margin in Q3 was 77.6%, including approximately $600,000 of stock-based compensation expense.

Operating expenses of $75 million were within our target range of $73 million to $76 million and included approximately $10 million of stock-based compensation expense.

Our operating margin was 21%.

Our non-GAAP operating margin, which excludes stock-based compensation expense, was 29%.

Our effective tax rate was 37.6%.

Excluding stock-based compensation expense, our non-GAAP effective tax rate would have been 33.5%.

We continue to generate strong cash flow.

Cash from operations was $38.2 million and we ended the quarter with $633 million in cash and investments.

On the balance sheet, DSO ended the period at 53 days.

Inventories at quarter end were $9.3 million.

Deferred revenue increased 11% from the prior quarter to to $83.2 million.

Capital expenditures for the quarter were $4.5 million and depreciation and amortization expense was $3.9 million.

During Q3, we added approximately 75 employees, ending the quarter with 1,355 full-time employees.

Moving on to the fourth quarter outlook.

We are seeing early indications that our investment in sales and support headcount over the first half of our fiscal year is beginning to pay dividends.

As a result, we are targeting revenue in the range of $142 million to $144 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 $78.5 million and $81.5 million, including approximately $10.5 million of stock-based compensation expense.

Our effective tax rate for the quarter is anticipated to be 37%.

Excluding stock-based compensation, we expect our non-GAAP effective tax rate to be 33%.

We expect our Q4 earnings per share to be in the range of $0.53 to $0.55 on a pre-split basis and $0.27 to $0.28 per share reflecting the two-for-one stock split announced in our press release today.

We are continuing to invest in the growth of the business and plan to add 100 to 120 employees this quarter.

We estimate DSO's will be at or around 50 days.

We expect inventory levels within a range of $8 million to $10 million.

And we anticipate-flow from operations to be in excess of $40 million.

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

Thanks, Andy.

And good afternoon, everyone.

We're actually speaking today from Chicago where we are hosting our annual North America partner summit.

We have approximately 300 sales persons, sales engineers and managers from our North American VAR's in attendance at the conference.

This is an exciting opportunity to meet with these partners and share our plans for the upcoming years.

Q3, which marks our 18th quarter of sequential growth, was another solid milestone for the Company.

The percentage of business from each of our key geographies was pretty much as expected and was similar to previous quarters.

Business in Japan was down sequentially as expected in the first quarter of Japan's fiscal year but the drop was much less than previous years.

Our U.S.

Federal business continues to demonstrate the strength we have seen in recent quarters and represented approximately 6% of revenue for the quarter.

Our EMEA business also experienced sequential growth in Q3.

And our business in Asia Pacific, though down slightly on a sequential basis, actually had an increase in order bookings, which bodes well for growth in Q4.

U.S.

enterprise business also delivered sequential growth as we continue to make progress in the Fortune 500 accounts.

Our North American service provider business was down from the previous quarter and below our internal forecast.

The service provider sales pipeline remains strong but we did experience some slippage of deals, which were originally forecast for Q3.

However, we expect most of those opportunities to close in Q4.

Our services business once again produced solid sequential growth, with yet another sizeable increase in deferred revenue.

From a product perspective, the mix of business remains similar to the previous quarter, with our core application delivery controller business accounting for approximately 92% of the total.

Our competitive position in our core business remains very strong, as indicated in the latest Magic Quadrant from Gartner.

Where we continue to advance up and to the right and to occupy the clear leadership position in the market.

During its first full quarter as the new high end of our application delivery controller family, the BIG-IP 8800 continued to meet our expectations and was responsible for some key wins.

We believe the BIG-IP 8800 system has no real viable competitors today.

And we expect demand for this product to increase this quarter and into fiscal 2008, as both the volume and complexity of Internet traffic continue to grow at significant rates.

Our FirePass sales were up sequentially, as expected, reflecting the strength of our competitive position in a market that remains relatively flat.

In application acceleration, we're seeing very good traction with our WebAccelerator product, which is now available as a software module on Big-IP.

WebAccelerator is proving to be a really great competitive differentiator on TMOS and has contributed to a number of strategic BIG-IP sales wins.

Sales of WANJet, our symmetric WAN optimization solution, continued to be slow as expected and we do not see that situation changing until we release WANJet availability on TMOS.

Recently we have moved into beta phase with this product, which we believe will position F5 as a key player in the WAN optimization market in fiscal 2008.

Montreal continues to be on track for delivery to market at the end of this calendar year.

During the last quarter, we had discussions and product demonstrations with potential customers of Montreal, during which we provided detailed information on Montreal's architecture, performance targets and functionality.

The reactions have been extremely positive and we expect Montreal to increase our technology leadership in the application delivery controller market during fiscal 2008.

Last quarter, we talked about some of our new marketing initiatives, including the partnership with Microsoft, where we announced the industry's first application ready network solutions for Microsoft applications.

The Microsoft application ready network solution contains prescriptive architectures, designs, applications and deployment guides.

These tools utilize the entire product portfolio to optimize Exchange 2007, SharePoint 2007 and Vista applications.

During Q3, we held a number of joint marketing seminars with Microsoft in some of our key regions in North America.

The seminars proved to be very successful in evangelizing the F5 value add for these Microsoft solutions and resulted in the addition of significant new prospects for our sales pipeline.

We also introduced an application ready network for SAP solutions last quarter and we plan to extend the support to our other major application partners.

As far as Q4 guidance is concerned, Andy provided our target revenue range, which will result solid sequential revenue growth this quarter and position us for continued growth in Fiscal 2008.

Historically, Q4 has been a strong quarter for the Company and we expect that trend to continue.

Apart from EMEA which tends to see some softness in the summer months, we expect to see solid growth from all of the other geographies.

We expect to see strong sequential growth in Japan and continued growth in Asia Pacific.

We also expect sequential growth in the Americas, which includes our U.S, Federal, and service provider business.

As a result of our high contract renewal rates driving the continued growth of our deferred revenue, our service business showed another solid quarter.

To leverage the strength of our product road map and market position, we plan to continue with our aggressive high income growth strategy in Q4.

During fiscal 2000 to date we increased our employee base by 285.

And as Andy mentioned we plan to add another 100 to 120 employees in the current quarter.

Our key goals with these investments are focused on top line revenue, customer satisfaction and technology leadership.

We believe these investments will bear fruit in Q4 and into fiscal 2008.

And I continue to feel very positive about our current market position, as well as our potential for continued growth.

I want to thank the entire F5 team and our partners for their support last quarter.

And with that, we'll hand the call for Q&A.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from Samuel Wilson.

Your line is open.

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

JMP Securities, good afternoon, gentlemen.

Just sort of two questions for you today.

Can you give us a sense of what linearity was in the quarter?

And also can you just give us a sense of how the overall environment, if there's been any sort of material change in the last 90 days in terms of the overall demand environment?

Thank you.

Yes, so on the first question, Sam, the linearity, we were -- the third month was 49%.

And then in the overall environment, Sam, no major changes, as I mentioned in my script there.

We did see some slip[age of deals in the North American service provider market.

That's mainly down to the fact that these are larger deals and very, very big projects where our control frankly isn't as much as it is in the enterprise.

But overall globally, we think it's pretty good and that's why we feel good about Q4.

Perfect.

Thank you very much.

Good quarter, gentlemen.

Thank you.

Inder Singh, please state your company name and you may ask your question.

Yes, hi, thanks.

I'm with Lehman Brothers.

I wanted to ask you a question about really the guidance.

The fact that your book-to-bill is greater than 1 and you did have some of these service rider contracts perhaps slip in timing.

It would seem to me that perhaps your guidance could be a bit on the conservative side.

What's your philosophy on that right now in terms of, are you trying to be conservative?

Are there risks that you're trying to quantify in the guidance that perhaps you could give us some color on, please?

Well, first of all, the guidance is the guidance and we wouldn't comment on whether we believe it's conservative.

But we obviously, it's our system for providing guidance.

It's been pretty effective for the last four to five years.

And it's based really on strong pipeline, competitive strength, the bottoms up forecast.

And obviously, absolutely the deal slippage from Q3 as well but that's fundamentally what we base our guidance on.

And then as far as the Montreal, you're really not counting on revenue from that until next year, so is that right?

That's correct.

Our goal is to get Montreal out to market at the end of this calendar year.

And by that, we talk about then achieving revenue.

Great.

Thank you, gentlemen.

Thanks.

Troy Jensen.

Your line is open.

Please state your company name.

Piper Jaffrey.

Thanks for taking my question.

A quick question for John.

NetScaler seemed to have struggled a little bit in the June quarter.

I wondered if you could talk maybe about your win rate versus that competitor?

Yes, it's interesting.

Our win rate is extremely high across the board, extremely high.

When we looked at some of the -- if you take the service provider space, we didn't see any lost deals there.

We saw slippage and generally, that's what's going down.

Every now and again, we will lose typically a small opportunity to Cisco because we can't get much face time with the customer.

But a significant portion of the time we win.

And from our NetScaler perspective, with the 8800 and the 8400, with TMOS and all of the modules we've got in TMOS there, we feel we're in a really really strong position.

And that was reflected, I think, in the latest gap in the Magic Quadrant.

All right, got it.

And to follow-up on Inder's question about?

Given that the 8800 has got pretty longer than expected sales cycles, I would expect that Montreal is going to be similar if not longer given its more complex system?

It's possible.

We'll see.

I'd also mention that we actually let some customers touch Montreal last quarter.

That's not beta.

I don't want to give that impression.

But clearly, it's in a strong position when where we're at that point where we do that and their reaction was very very strong.

So I think there will definitely be some, I think, suppressed demand and then we'll see how the sales cycle goes.

But certainly, the value is going to be high in terms of the actual sale itself, the higher e volume with Montreal.

Got it.

Keep up the good work, gentlemen.

Ehud Gelblum.

Your line is open.

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

Hi, thank you, it's JPMorgan.

A couple questions, if I could.

One, I don't know if you mentioned you said the 8800 was doing well and that you expect it to be a larger percentage of revenue as you go forward.

Can you give us a sense as to what percent of revenues right now are 8800 and how large you expect that to be?

And then, as you look at these, I think you said, 285 people that you've hired now, and the headcount continues to grow, when do you think we'll start seeing revenue growth accelerate, as you start kind of getting the impact of the larger sales force on your sales?

So that your volume could actually -- could we see sort of an increasing growth rate at some point when they get to full quota?

What's the timing on seeing the impact of that?

Both very very good questions but unfortunately, both I'm not going to give you absolute direct answers but we'll give the best color we can here.

First of all we don't give out a percentage by specific product.

So we don't do that.

However, the 8800 has definitely been really well accepted.

We won some real key new business accounts.

Some of the globally named dot com accounts for the 8800 last quarter, so we're very pleased about that.

And there's a lot of evaluation interest in it as well.

So feel good about that but we don't give the percentage out.

Regarding the growth, clearly, 285 starting the quarter addition this fiscal year with a continued aggressive hiring of 100 to 120, we're clearly looking, at I said, one of the main ideas we're looking for is top line growth.

And I think we will see the fruits of that as we move into the next fiscal.

But we won't really talk about that in any sort of detail until we come to October.

But we do absolutely expect to see some productivity coming from that investment.

Okay, could I sneak one last thing in?

You're doing a great job moving WANJet over to TMOS, at least I assume you are.

And you're expecting that to, when it gets on TMOS, to be a contributing factor to the whole WAN consolidation market.

In the back of your head, in case that doesn't work, how do you think about your plan B?

What are you looking for if WANJet on TMOS does not pick up to some acceptable level?

Would you consider some sort of M&A type of arrangement to get into that space or do you think that you'll just keep going with the strategy you have right now regardless of what the outcome may or not be once you have it on board?

Yes, we are always looking at the M&A space.

We do that constantly.

We're looking at opportunities that typically are adjacent to what we do.

In other words, very much an application layer space, very much linked to knowledge within Internet protocol.

WebAccelerator by the way is, that's the other product that we've got with the acquisition of Swan Labs, is proving to be a major differentiator.

But we're always doing that.

We're always -- that wouldn't be a change in strategy for us actually to do that.

In terms of WANJet on TMOS, it's moving into beta phase, which means we're letting customers touch it and clearly that's a big milestone.

And we do expect it to give us growth in 2008 but that's not the one and only target that we've got in terms of our growth drivers.

Great.

Thanks so much.

Ehud, this is Dan Matte speaking.

One of the other things, just a point to highlight from what John mentioned, with WebAccelerator, you may have noted during the quarter, AT&T announced a new service for their hosted customers too that's an acceleration service based on WebAccelerator.

So we think some pretty good stuff is happening with that product.

Great.

Erik Suppiger, your line is open.

Please state your company name and your ask your question.

Signal Hill and good afternoon.

First off, could you speak a little qualitatively about the bookings growth?

Last quarter your book-to-bill was less than 1 and this quarter your book-to-bill is more than 1, so it's difficult for us to get much of a sense for the sequential growth that you saw.

Can you just speak a little bit qualitatively, if not quantitatively, on how the growth looked?

Yes.

The only time we've talked about book-to-bill was we've given a clue to book-to-bill is twice and that's when it's below 1.

Above 1, we just leave it at that and don't give anymore details on that.

All right.

Can you give us the stock comp on the individual line items for the operating expenses?

Could you ask that again, Erik?

The stock comp on individual line items.

You can get that in the press release at the bottom of the income statement.

Okay, all right

It's broken out there.

And then lastly, how much of your telco business is North America?

We haven't broken that out and don't have it, first of all.

But we generally don't break it out across the theaters.

We do, however, comment that telco is represented strongly in all of the theatres.

We have a broadcast her base there.

And Erik, just to give you more color on the bookings this year.

Again, we don't talk about it from a quantitative point of view but all of the geographies, except Japan, were up in bookings last quarter.

And Japan was absolutely expected to be down because of the first financial quarter.

And it was just North America where the telco was pushed out?

That's correct.

Very good.

Thank you.

Mark Sue your line is open.

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

Hi.

It's RBC Capital Markets.

Just on the service provider deal slippage, was it one or was it more than a couple of carriers in North America?

Was it all 8800 and were there more stall tactics from competitors or is it just greater time for evaluations?

If you could just help us with some granularity there?

Yes, it was a few.

Some of them did involve the 8800 as well, and they tend to be involved in some other [color.] We also did see some slippage with the Nokia type relationship and Ericsson.

We saw some there as well but most of it was North America and some of it was the 8800.

And it's just the one quarter?

The deals are still ongoing.

I see.

But you're confident that these will close this quarter is pretty high?

They're forecast to close.

Got it.

And then separately, John, just on trends and deal sizes as we kind of finish the fiscal year end, if you could comment on that?

And also how you feel about headcount growth translating directly into revenue growth?

Yes, on the deal sizes, we ended with the introduction of 8800 and the uptick of 8400, we're seeing it go up, so it's moving north of $160,000 for us now.

Yes, on the sales productivity and hiring and investment, the key really is that; What is the number going to be once salespeople in particular are in the Company more than six months and what range we tend to hit there?

So we're still looking at that.

But the very fact that we're continuing to hire gives an indication of how we believe the strategy is going.

Got it.

And you feel like your success rate with your hires have been so far so good?

Yes, we're happy with the overall hires, yes.

That's helpful.

Thank you, gentlemen.

Paul Mansky, your line is open and please state your company name.

Yes, it's Citigroup.

Most of my questions have been answered but I would like to just get clarification on Montreal if I could.

Are you expecting revenue contribution in your December '07 quarter?

In the December '07?

Well we're targeting it for market at the end of this calendar year.

So it's going to be touch and go, to be perfectly frank between; Will we get some revenue in December or is it going to slip a few weeks in January?

But it's in that space and it's on track for that.

Okay.

I don't want to be too specific when we're talking about weeks on a major, major project.

Absolutely.

Understandable.

Great.

Thank you very much.

Matt Robison your line is open.

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

Ferris Baker Watts.

I'll start with my usual question.

[Deb] Central number of users?

This is Dan, we're at 17,429.

So up about 2,100 then?

That's correct.

And Andy, what was cash flow from option exercise or was it still pretty small given that you've switched to shares?

No.

It was just over $9 million.

And we had our employee stock purchase plan exercise, which we think kind of drove out this quarter.

Can you guys comment on the tone of business in terms of infrastructure buys for the data centers of the big Internet content providers?

I think it continues.

You see acceleration in all of these big data centers and then put up around the Rivers up in your part of the world?

Yes.

No, I think that's absolutely a target market for us and that's why, and complexity and performance seem to be the key buying criteria and of course that's where the 8800 leads.

So that's a big opportunity for us I think as we move into fiscal '08.

Do you think that's -- has that been growing faster than the rest of revenue or is it something that you're looking more forward to?

Yes, it's too early to tell.

We basically view our business now as three main areas, the enterprise, telco, and then if you like the big dot coms, and all three, we expect to see growth.

I think in the past, you've talked about those dot coms, as a segment, separately a little more than you did today.

Am I remembering that wrong or I think you call it the technology?

Yes, and we still do.

We still call -- that's part of our technology vertical.

Right and that was as strong as the other businesses?

Yes.

We'll give you a number actually.

19%.

Okay.

Thank you.

Richard sherman your line is open.

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

Yes, hi, good afternoon.

It's MKM Partners.

Did I hear the cash flow guidance at about $40 million, that would push you north of $160 million for the year; is that correct?

Well, you did hear correctly in excess of $40 million.

I'm not sure of the total off the top of my head.

Okay, all right, thank you, Andy.

It is strong cash flow generation.

Absolutely.

And then on the R&D and your operating expenses, obviously, last quarter you were talking about 60 to 80 and now we're seeing hiring in the 100 to 120 range.

Just looking at the R&D numbers, I know there's lots of support and sales hiring going on.

It looks like R&D has been creeping up in the last four quarters in the four quarters as percentage of revenue.

When might that start to turn and you start to see better leverage off your R&D investment?

It is round Montreal?

Is that the next break point where we might actually see R&D begin to drift lower as a percentage of revenue?

I think what we'll do, as we've talked about in the past, is look at our road map and our projects and what we want to accomplish and we're going to hire accordingly to keep technology leadership.

Yes.

That's always been our strategy.

We believe technology leadership is absolutely key and I don't see a scenario where we back off on our investment in R&D.

Yes, and Rich, it is just about $160 million for the year based on my guidance there.

Okay, very good.

So just back on the R&D question, is there a target number that you're looking at in terms of R&D or are we thinking 35% to 36% as a percentage of revenue or would we expect to see -- a simple question is will we expect that to continue to increase as a percentage of revenue?

If we look at last quarter the people that we added, 30 of them were in R&D.

We had a focused hiring there and yes, I think we're going to continue to invest.

We don't have a specific target.

Really, it's around our strategic objective of accomplishing our road map, keeping technology leadership.

So next quarter, when we do kind of our annual talk -- our annual call, when we give guidance for fiscal year 2008, we'll give you more color on what our targets we expect there.

Very good.

I think I said 30 and then 13, excuse me.

And then maybe just lastly, on the telco deals that you've talked earlier, have any of those closed early in the quarter?

Yes.

We wouldn't talk about that.

But as I said in the call, we expect a number of the deals, most of them actually that we saw slippage to actually close during the quarter.

Very good.

Thank you, John.

Thank you.

Manny Recarey.

Your line is open.

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

Kaufman Brothers.

Good afternoon.

Just one question, if you can give a little color on the security market.

Is that still one that has a lot of potential but still it hasn't really started to accelerate growth or do you see that starting to accelerate soon?

First of all, there's two layers in the security market.

One is an application of firewall, the ESM, that's a security module.

That's an interesting product in the sense that that does a bit like WebAccelerator.

It runs on top of BIG-IP and it performs our security function for the application layer.

It leverages a lot of the BIG-IP sales.

So when we talk about the sales in that, we're only talking about the price of the module, we typically don't include leverage sales, which might be used for other things.

But it's difficult to actually judge that market but we see it as a major differentiator for us.

Regarding FirePass, which is our more access SSL VPN, I actually said in my script, that we had sequential growth.

We got some nice deals actually last quarter.

We feel really great about the position but the market itself has proved to be somewhat lumpy, not growing tremendously over the last couple years.

And we don't see any major [things] that's going to change that in the near team.

So we like it, we like our competitive position but it's certainly not a robust growth market as the other markets we're in.

Okay.

Thank you.

Tim Long, your line is open.

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

Bank of America.

Good afternoon, guys, this is actually Jeff [Fluberg] dialing in for Tim.

A couple questions.

I was hoping you could provide more color on the product revenue and the service revenue?

Despite some new products, it looks like product revenues have actually been de accelerating on both a year-over-year and sequential basis for the last three quarters, yet the service revenue has experienced very strong trends.

Can you talk about what's driving the strength in service revenue and why we're seeing -- we haven't seen a real improvement in the product revenue despite new salespeople and new products?

And then how important is growth in the security business and WANJet to your guidance?

And have there been any additional thoughts on a buyback going forward?

A lot of questions there.

Thanks, guys.

First of all, the service product revenues, that question, yes, the service number is driven by number things.

The higher tax rate, the higher renewal rate, the professional services as we get into major deals.

So that looks like it's going to be a very strong business for the foreseeable future and going to continue to grow.

The product revenue, you're absolutely right, was somewhat down last quarter.

However, I think it's important to realize that the product bookings, because of our book-to-bill being less than 1 last quarter versus greater than 1 in this quarter, was actually faster growth than the product revenue.

Okay?

So that's important.

And then when you look at forecasts for this quarter, where we talk about the range that we talked about, then we are expecting some acceleration of product revenue growth as we move into Q4.

So I think that's very important to take that into account.

On the service revenue, how important is purchase of new software modules to driving the service revenue?

And should we look at growth in that service revenue business as a sign that people are purchasing more and more and more of your different modules and that's requiring service for installation?

It's important but I don't think it's something that you should link.

In other words, if our service revenue growth is really good, you shouldn't make that assumption that by definition that means our modules are going really well.

We believe they are going really well but I just wouldn't link the two.

I don't see that and there's a service cost associated with the modules but it's also associated with the systems too.

There's no real correlation there.

I'm sorry, what about the other question?

I know one was a buyback, I don't know if that was all.

But on the buyback, we said in January that we had a big discussion at the Board level on that and we haven't had one really since.

We may well have one in October.

That's possibly likely.

So the situation remains the same, which is we love the balance sheet.

We're competing against Cisco.

We want some flexibility, so nothing certainly in the short-term on buyback.

And then just how much growth is needed from the security and the WANJet business to get the current numbers?

And how are you thinking of those lines going forward?

Is it more of an option or is it something that needs to really kick up to see good growth in '08?

Right.

And again, that's quite a complicated answer.

So if you look at the WAN optimization side, WebAccelerator is becoming a key differentiator for BIG0IP sales.

So from that perspective that is actually quite important and we feel very very good with the trend.

WAN optimization, which is the WANJet product in the short-term, is really not figuring in any big way in our forecast.

And that's what effectively what I said in the script.

And then FirePass, again, we feel good about our competitive position but we are a little bit weary because we've seen effectively two years of lumpiness.

So the bottom line is, when we look at the growth drivers the application delivery controller market, the core BIG-IP is the key one we look at.

Thanks, guys.

Rohit Chopra, your line is open.

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

Wedbush Morgan.

Good afternoon.

A couple questions.

First one, on the new WAN product, who is the initial target market?

Do you stay with the data center folks or do you go after the same market as Riverbed?

And if you do that, should we expect some kind of increase in sales and marketing more than is anticipated right now?

Yes, first of all, the WAN optimization method, remember there's two sides to this, from our perspective.

There's WebAccelerator and there's WANJet.

WANJet, which is a symmetric solution, in other words you have a product at the branches and there's a product in the data center.

And that's absolutely focused against Riverbed but in reality where we stay non-competitive until we get onto TMOS, we haven't been putting much attention on it.

We will probably change that almost certainly when we move into fiscal '08, especially when we have our sales conference in October.

From that perspective, we sell a lot to people.

We sell today, so it's in the data center, sometimes it's at the branch, but we're having no problem finding prospects.

WebAccelerator, we actually think we've got technology lead there sitting on top of TMOS and there, we tend to sell to the same people that would buy the BIG-IP product.

Okay, and then the other question was back to service providers again.

You mentioned some wireless companies.

Were there were any wireline deals that may have slipped as well?

Yes, Tom Hull Is nodding at me here that there was.

But we're not going to go into specific details of deals that slipped.

Okay, thank you.

Brent Bracelin your line is open.

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

Pacific Crest Securities.

A couple of kind of follow-up questions for me.

One, on the obviously acceleration and pace of hires here, where are you looking to redeploy kind of additional resources?

Is it wireline, wireless, kind of the core enterprise or security?

Just a little color on where you guys are applying some of those additional resources or plan to apply the resources.

And then, secondarily, just looking at kind of traditional seasonality and looking at kind of your guidance here.

Could you talk a little bit about kind of the positive swing factors that you look at that could drive upside to your guidance relative to historical seasonality that is a little stronger?

And then, also what are the negative swing factors that you guys are considering as you kind of enter your fiscal year end here?

Okay, yes.

So first of all resources.

With hiring across-the-board, specifically I think you were focusing on sales there, we're hiring globally.

Tom Hull's Management team are all constantly requesting headcount and we're giving them it.

And maybe not always as much as they want but we are.

And that's -- so from a geographic point of view, we're hiring in all of the major geographies.

And then, when you look at each geography, we're looking at the labs, dot com type [locality.] We're hiring in service provider world and we're more focused on the enterprise.

So it's really across-the-board.

I wouldn't say it was one vertical more than another.

That's that.

And you were asking the question about when we look at our forecast, What's the swing factors that we look at?

Well first of all, Q4 tends to be historically strong for us.

It's the end of the financial year, it's when salespeople are pushing hard to get to the sales quota club that we have.

You tend to, from a budget point of view, see a very strong Japan.

You tend to see a very strong Federal.

We've historically seen a strong U.S.

enterprise and service provider as well, before they move into the end of the calendar year.

EMEA tends to be slightly in the weaker side because of the summer, so we take that into account.

I think I mentioned Federal, their fiscal year end.

And then we did take in account the pipeline.

Pipeline and bottoms up forecast are actually the two key measurements that we look at.

Okay.

Does that answer the question?

Yes, obviously, as you look at kind of historical seasonality, it's been a little bit higher than what you're guidance was.

And I don't know if there was anything kind of from a challenge standpoint or hurdle standpoint that you're baking into your numbers?

Or again, is it partially being kind of conservative here?

Well, we'll see.

We'll see how it all transpires.

The actual guidance we've given is actually higher than normal.

If you check out our guidance of last year and previous quarters, you'll find our guidance is actually higher.

And we'll see how the quarter ends up.

Okay, fair enough.

Thank you.

Ryan Hutchinson your line is open.

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

WR Hambrecht.

Good afternoon, guys.

I have a follow-up to an earlier question.

Just in terms of the guidance as we look our here, based on your commentary, John, is it fair to assume that the product revenue grows at a faster pace than the services revenue in the quarter?

We didn't comment on that but we definitely expect to see acceleration in the product revenue growth.

I'll leave it at that.

And then it looks like there's some, not necessarily an issue, but some share shift perhaps within your distributors.

Your two largest historical distributors are down sequentially.

Can you just walk us through what the dynamics there are?

Again, no major dynamics happened.

Yes, Tech Data, which is the distributer that has nearly come on above 10%, their biggest reseller is Dell.

And in turn, they're our biggest value-added reseller and that business is driving and growing and that was the result.

Yes.

Okay.

But the question is, is there a share shift going from Ingram Micro to Avnet or any changes in those relationships?

No.

We haven't seen any change in relationship or any trends.

They are all -- those three that we talked about, greater than 10%, they are key, key partners for us.

They will all be in attendance at the event that we're having right now and they are really very strategic for us.

So, I wouldn't read anything significant into that.

Okay, fair enough.

And then finally, just as we look at the WANJet product again here, adding disc space, caching, porting onto TMOS, do you feel that that puts you on to an equal footing with some of the competition there?

And if so, when should we see a meaningful uptick in that revenue stream?

And if not, what additional features are needed to put you on par with some of the competition?

Yes.

I don't think it puts us on equal footing.

It would be wrong to imply that.

It puts it in a much stronger footing than we had today and it also gives us some differentiation because it's on TMOS.

So from that perspective, I think, if you look at where we're at, we can definitely see some growth coming.

But the reality is we think it's going to be towards the sort of middle of the fiscal year '08 where we get in a strong competitive position.

Some of that is to add some more protocols, that type of stuff but we do expect to see some growth from that market.

The good thing for us is that we can be reasonably patient because our core business is growing.

And we've WebAccelerator that's growing and accelerating, pardon the pun, as well.

But really, realistically, I think you'll see some growth because of TMOS but from a competitive position, in terms of being very very strong we think it's going to be the middle of the fiscal.

Great.

Thanks.

That's it for me, guys.

Cameron Cooke, your line is open.

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

Janco Partners.

I just wanted to get back to the sales cycle question a little bit.

Does the move to a chassis-based architecture on Montreal affect the sales cycle at all?

Can you speak a little bit about that?

I don't think It will be very very significant.

It may do it in the sense that we do expect the size of the opportunities to get bigger and some things are going to affect decision-making, but it's the same people we're selling to.

It's the same value proposition.

It's the same market, so I don't think it will be very significant.

And I have said in previous calls and we've seen this with the 8800.

When you've got flagship product like we have with the 8800 today and we will have with Montreal, where you get effectively no competition for it, that tends to drag the other products faster.

So in other words, a customer will buy a 6800 because they know they have a lot of head room going up.

So it tends to actually increase the overall momentum by having a very very competitive flagship product.

And would you consider this as big a change as Buffalo Jump was for you guys back in '04/'05?

Interesting question.

I don't know if it's quite the change but it certainly is a real, I think, we think, game winner in terms of how competitive it is from a leadership point of view.

But it's a difficult comparison because one was a total re-architecture where the whole product line changed.

The other -- Montreal is where you're adding to the top end of your range.

Thank you.

Thank you.

Our last question comes from Bill Choi.

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

Okay, that's Jefferies & Company.

First a clarification, just the modules, both security and acceleration, those module revenues are properly categorized in security and WebAcceleration that's given or are they included in ATM?

Hello?

Hello?

Yes.

Did you hear the question?

Yes, we said that's correct, they're included.

Okay, all right.

And then just a follow-up on that distribution.

Does all Dell revenue go through Tech Data?

Yes.

Yes, hard to say all.

There may be some that are global that doesn't but you should consider the absolute majority goes through Tech Data.

Okay, and then a bigger picture question.

I know that you guys are just under way with 8800 and Montreal coming in at the end of the calendar year but can you just talk a little bit about the product road map for next year?

So what comes after Montreal?

It's interesting.

We haven't talked about that.

We actually have a lot of products on the road map that we've not talked about.

We will do that actually in October and then we'll do that in a lot more detail on an analyst day that we're going to arrange pretty soon after October, in the November time scale.

So we haven't actually made that public yet.

Obviously, talking now you've got a heads up on it.

But that's where we'll go through our product road map in a lot of detail.

Because we actually have a road map that affects other places with just about every other product we've got on the drawing board right now, so that's pretty exciting as well.

But we'll give you that detail as we move into the fiscal.

Okay, thanks.

All right, I think that's the last question, so thanks again for calling in and we'll talk to you next quarter.

Thank you.

Thank you.

That concludes today's conference.

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