F5 Inc (FFIV) 2007 Q4 法說會逐字稿

Welcome to the F5 fourth quarter financial results.

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.

Welcome to our conference call for the fourth quarter of fiscal 2007.

Speakers on today's call are 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 Operations and Global Services; Tom Hull, Senior VP of Worldwide Sales; Chris Lynch, Senior VP of Data Solutions; 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 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In addition, you can access an archived version of today's live webcast on the events page of our website through January 23.

From 4:30 today until 7:00 p.m.

Pacific time, October 25, you can also listen to a telephone replay at 866-501-8771 or 203-369-1851.

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 release and described in detail in our SEC filings.

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

Before we begin, I'd like to remind you that we are holding our analyst investor meeting on November 2, a week from this Friday, at the InterContinental at the Barclay in New York from 8 a.m.

until noon.

If you'd like to attend this event and you haven't already registered, please contact Carolyn Burkhardt at 206-272-6590 or send an E-mail to analystmeeting@F5.com.

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

Thank you, John.

Q4 was a promising finish to another solid year.

Results for the quarter marked our 19th quarter of sequential revenue growth and pushed us past the half billion dollar mark in annual revenue.

We completed the acquisition of Acopia, a move that we believe has very positive implications for our growth in fiscal 2008 and beyond.

Including Acopia, we added a total of 225 employees during the quarter, raising our total head count by nearly 50% for the year.

In addition, we generated a record 47.7 million in cash flow from operations this quarter, leaving us with a balance of 475 million in cash and investments at quarter end.

During the next few minutes, I'll review our results for the fourth quarter, provide guidance for the current quarter, and discuss the year ahead.

As always, all results and guidance discussed in my remarks are GAAP numbers unless otherwise indicated.

Revenue for our fiscal fourth quarter was 145.6 million, up 33.9 million or 30% over the same quarter last year and 13.2 million or 10% from Q3.

Our book-to-bill was greater than one.

Revenue from application delivery networking, security and LAN optimization was 144 million at the top end of the 142 to 144 million guidance we provided on our July 25 conference call.

In addition, we achieved 1.6 million in revenue from Acopia during the quarter.

Revenue from our core BIG-IP business was 132.5 million or 91% of total revenue.

Security revenue was $9.6 million, including $2.6 million from Application Security Manager and $6.9 million from FirePass.

LAN optimization and acceleration revenue was 2 million.

From a geographic perspective, the Americas represented 58% of revenue, [AMIA] accounted for 18%, Japan 13%, and A-Pac 11%.

By vertical, TELCO and technology each represented 21% of the revenue during the quarter.

The financial sector accounted for 17%.

U.S.

Federal Government generated 7% of revenue and total government was 12%.

During Q4, we had two greater than 10% distributors, Ingram Micro, which accounted for 10.4%, and Davnet Technologies which accounted for 13.3%.

Product revenue of 107 million represented 73% of total revenue.

Service revenue of 38.6 million was 27%.

Continuing down the income statement, gross margin in Q4 was 77.1%.

This includes 750,000 of stock-based compensation.

Operating expense was 93.3 million, including 9.5 million of stock-based compensation expense and a one-time $14 million charge for in-process R&D related to the Acopia acquisition which we disclosed in our September 13 press release.

Operating margin was 13%.

Our nonGAAP operating margin was 29.7%.

The effective tax rate for the quarter was 51%.

Our nonGAAP effective tax rate, excluding stock-based compensation and the charge for Acopia's in-process R&D, was 32%.

GAAP net income for the quarter was $12.9 million or $0.15 per share.

This result includes the write-off of Acopia's in-process R&D which reduced EPS by $0.16 per share.

Turning to the balance sheet, 47.7 million in cash flow from operations exceeded our target and contributed to cash and investments totaling 475 million at quarter end.

For all of fiscal 2007, cash flow from operations totaled 170 million.

Accounts receivable DSO was 57 days.

The increase from last quarter's 53 days was due primarily to the strong growth and deferred revenue, and the integration of Acopia.

Inventory of 10.7 million was up slightly from 9.3 million in the prior quarter.

Deferred revenue increased $17.3 million, or 21% from Q3 to 100.5 million.

Capital expenditures for the fourth quarter were 4.8 million and depreciation and amortization expense was 3.9 million.

We ended the year with 1580 full-time employees, including approximately 130 who joined us from Acopia.

Moving on to the outlook.

For the first quarter of fiscal 2008 ending December 31, we expect revenue in a range of 154 to 156 million.

Reflecting lower gross margins for Acopia, we expect overall gross margins in the range of 76 to 77%, including approximately 1 million of stock-based compensation expense and 750,000 of amortization of Acopia's technology.

Our operating expense targets are 94 million to 97 million, including approximately 14 million in stock-based compensation expense.

Our effective tax rate for the quarter is expected to be 38%.

Excluding stock-based compensation our nonGAAP effective tax rate is expected to be 34%.

Our Q1 earnings target is $0.20 to $0.21 per share.

We expect to maintain DSO's in the mid-50 day range.

Reflecting continued core business growth and the addition of Acopia, we expect inventories in the range of 13 to 14 million.

Our current hiring plan calls for the addition of 60 to 80 employees during Q1, and we believe we will generate cash flow from operations in excess of $45 million.

Now, I would like to talk about our upcoming fiscal year.

Although we don't provide specific annual guidance, I would like to share some general guidelines related to our expectations for fiscal 2008.

We expect to achieve sequential growth in revenue for the balance of fiscal 2008.

We do anticipate slower growth in Q2 due to seasonal weakness in North America.

Although we are increasingly optimistic about prospects for our Acopia business, our current annual target for this segment remains 25 to 30 million.

After an initial dip of up to 1%, we expect to see gross margins return to historical levels by year end.

Amortization of Acopia's acquired technology will be 750,000 per quarter.

While we anticipate that Acopia-related operating expenses will initially reduce our nonGAAP operating margin from current levels to the mid-20s, we expect this number to trend up through the year.

DSO should remain stable in the mid-50 day range.

We expect stock-based compensation expense to approximate current levels until our next annual grant in August.

Capital expenditures are expected to be approximately 8 to 10 million per quarter.

Based on current market rates, we expect to earn between 4.5 and 5% on our cash and investments.

We expect our tax rate to be 38% on a GAAP basis and 34% on a nonGAAP basis.

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

Thanks, Andy, and good afternoon, everyone.

I will take some time to cover some of the many highlights of fiscal year 2007, talk in some detail about the Q4 results, and then comment on our outlook and key initiatives going into fiscal 2008.

The F5 team should be proud of our progress and achievements in fiscal 2007.

With our Q4 performance, we have noted sequential revenue growth every quarter for almost 5 years; 33% annual revenue growth in fiscal 2007 has resulted in F5 being a clear leader in application delivery networking.

We start fiscal 2008 with a very strong balance sheet with approximately $475 million in cash and investments, and no debt.

We believe we are the undisputed technology leader in a core application delivery networking market and expect to increase this leadership in 2008 as we deliver a very rich product road map.

We're also very pleased that we continue to be the clear leader in the (inaudible) for this market, in terms of ability to execute and completeness of vision.

We delivered our flagship BIG-IP 8800 system in the first half of 2007, which has proven to be very successful with large enterprises, TELCOs, and large internet companies.

Check out the performance data we included in our recent press release demonstrating that the 8800 (inaudible) software clearly outperforms our competitors.

We have also added significant enhancements to our TMOS operating environment, including key functionality for the TELCO market as well as improved usability and performance capabilities.

During the year, we also delivered many enhancements to FirePass, to our Application Security ASM solution and to our WebAccelerator solution.

We believe these products are very competitive in their respective markets and we will be major contributors to our growth in fiscal 2008.

Our WebAccelerator product, which is offered both standalone and as a software modulant BIG-IP, is a unique best-of-breed technology that has been responsible for leveraging a growing proportion of our BIG-IP sales.

Similarly, our ASM application firewall solution is also responsible for leveraging a growing proportion of the BIG-IP sales.

WebAccelerator and ASM are now key components of our overall application ready networking strategy where we partner with large application solution vendors such as Microsoft, SAP, and Oracle.

We also announced today that our WANJet product running on TMOS as well as our partnership with EMC to market our WANJet product for optimizing EMC's (inaudible) SRDF solution.

We believe these two announcements are major steps in our goals to become a key player in the one optimization market.

Furthermore, we also believe that a significant synergy is to begin by linking our WANJet product with the Acopia solution.

From a partnership perspective, we have made great progress in fiscal 2007.

We continue to increase our channel with additional primary and goal resalers and distributors as well as increasing our (inaudible) rate with large systems integrators.

We also made excellent progress in our partnerships with the major application solution partners, including Microsoft, SAP and Oracle.

Our application-ready network strategy has been really well received by these solution partners, and we believe gives F5 a significant advantage in the marketplace.

[Debt Central], a developers website for partners and customers, continues to grow with users sharing best practices and (inaudible) solutions.

At the end of fiscal 2007, we had approximately 20,000 registered users on [Debt Central], up over 70% from last year, clearly demonstrating the value this resource is bringing to the market.

I am especially pleased with our acquisition of Acopia networks.

We believe Acopia's network-based technology is best of breed in the exciting file virtualization market.

The business benefits and return on investments from the Acopia solutions are extremely attractive, and we believe this disruptive technology will prove to be a significant contributor to the continued success of F5.

We are convinced there will be significant synergies from this acquisition, in terms of channel leverage, our current partnership, and especially from a product portfolio perspective.

We will go into this in detail at our annual analyst investor meeting on November 2 in New York.

I am very delighted to have Chris Lynch join the F5 executive team as Senior VP of Data Solutions.

Chris is with us on the call today.

As far as Q4, 2007 was concerned, I was delighted with our performance.

Revenue and sales bookings were strong across all geographies.

We saw strong performance in Japan at their half year close, [AMIA] had a solid performance given the usual summer seasonality, and Asia Pacific continued to deliver quarterly sequential growth.

We also experienced solid growth in North America.

Our services business once again proved to be very strong and continued to increase our service deferred revenue backlog.

We now have 100 million of deferred revenue on our balance sheet as we enter fiscal 2008.

We have made significant investments in our service business over the year, both in terms of head count and infrastructure, and we are seeing the results of these investments pay off with increased levels of customer satisfaction.

I would now like to comment on some plans we have for a project road map.

Obviously, we will provide much more detail at the analyst investor meeting next week, so I will keep my comments brief.

Our next generation BIG-IP product in Montreal has recently moved to formal customer beta testing phase which is a major milestone.

Montreal is on track for bringing to market at the end of this calendar year.

Regarding LAN optimization and WebAcceleration, a recent announcement of the release of WANJet on TMOS brings key functionality to this product, including centralized management with our enterprise manager, as well as discussing capability.

We believe our WANJet product offers the best data center to data center optimization solution in the market today, and we are excited about the EMC partnership.

As I mentioned earlier, we see significant synergies between WANJet and the Acopia solution.

We also believe our WebAccelerator solution is best of breed and offers a compelling value proposition for our customers.

We expect to move to customer beta test phase with our FirePass SSLVPN solution running TMOS during the quarter.

Our goal is to increase the number of supported users on this platform by up to a factor of 10 from the current FirePass solution.

We believe this will give FirePass a strong competitor advantage in the marketplace, and will be a more attractive solution for customers looking to replace existing IP set installations.

Looking forward to Q1 in fiscal 2008, Andy has indicated that we continue to see sequential growth in our business, and I believe F5 is very well positioned to take advantage of the continued demand for our solutions.

As Andy also pointed out, we believe we can grow our business sequentially each quarter during the upcoming year.

We have made significant investments in 2007 and we expect to benefit from these investments in fiscal 2008.

We issued a press release today indicating that Tom Hull, our Senior VP of Sales, has decided to leave F5.

Tom is here with us on the call today and will also be in attendance at our analyst investor meeting in New York next week.

I know I'm speaking for the entire F5 team when I thank Tom for his significant contribution to F5's success over the last four years.

From a personal perspective, I have enjoyed working with Tom and wish him all the best for the future.

Tom has built a very strong team around him, and I'm happy to congratulate Mark Anderson on his promotion to Senior VP of Worldwide Sales and look forward to him joining or executive team.

Mark has delivered tremendous results as VP of North America Sales Organization.

I look forward to Mark continuing the success in his new role.

Mark will also be present at next week's meeting in New York.

Finally, I would like to thank the entire F5 team and our partners for their efforts and support in fiscal 2007, and with that we will open our call for Q & A.

(OPERATORS INSTRUCTIONS) Our first question from Samuel Wilson from JMP Securities.

You're line is open.

Good afternoon, everyone.

It is a big list, so I won't try to name all of you.

Just three very small questions, first, given all the gyrations in the capital markets over the last few months, I'm just wondering if you saw any sort of change in buyer behavior from the financial services vertical?

John, I just wanted to get a generic commentary on the competitive environment out there.

Have you noticed any change in pricing?

And then, lastly, qualitative comments on what the channel feedback has been about the acquisition of Acopia.

Thank you.

Okay.

On the first one on capital markets, we definitely saw some issues in the finance vesical.

The actual vesical was 17%, which is slightly down in our run rates, which normally is about 19, maybe 20%.

We saw a little bit there.

We also --, we had some really good wins, but it was sometimes a struggle to get those wins out of the customer, though we managed it in most cases.

Yes, definitely some concern there, and we're going to keep looking at it, and that's obviously been included in our guidance.

Nothing has dropped through the floor or anything like that, but definitely slightly tougher.

We haven't really seen it in any other environment.

It was mainly in finance, in fact mainly in the East Coast, to be specific.

Compared to the environment, we think we're in really good shape.

We have a lot of products now, so I need to qualify that.

And BIG-IP we think absolutely, as I said, way ahead of the competition.

We just finished most of our sales reviews this week, we're actually having our one-way sales conference.

We had a very, very high win rate against the competition.

The field does not have any major concerns in the BIG-IP application space.

WebAccelerator, I mentioned, is almost unique in terms of web acceleration.

Obviously, one optimization has not really been a player, but we intend to change that with the announcements that we made today.

Not much point in commenting on that.

FirePass, we think we have a really good product.

Our main competition is Juniper.

We win as many as we lose in that space.

The market's still a little bit on the stagnant side.

But, overall from a comparative point of view, we're in very, very good shape.

Acopia, which we don't have much runway on, although Chris (inaudible).

We think that's absolute best of breed.

Chris has been introducing needs and some of the other execs, a lot of customers, and we feel pretty excited about that.

Shall I go on?

The channel reaction has been awesome with the Acopia acquisition, so has the customer reaction, so has the employer reaction in both companies.

It's almost like, I said to Chris yesterday or the day before, we're still in the honeymoon period, but frankly it's very, very exciting.

And obviously, we think we'll get more channel partners because of this.

Great, thank you very much, everyone.

Thank you, our next question, Mark Sue, RBC Capital Markets.

Your line is open.

Thank you.

If I strip out Acopia, and I look at your base business, the mid point of your guidance seems to indicate very low sequential rate of growth for the upcoming quarter, and historically it's ranged between 7 and 10% sequentially.

I'm just trying to see where the delta is.

Is that all financial verticals or is it something else?

Is it lull of large numbers.

It doesn't really seem to be competitive, if you could help us, that would be great.

Yes, you are pretty low there, Mark, but I think I got you.

We use the same process every quarter for guidance, and we use that process held as well.

In terms of your statement, I think you said we normally do 7 to 9, that would be on the high side.

I wouldn't get confused between guidance and actual.

But, yes, we use the same process.

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

We're in good competitive shape, and we think it's good growth.

That's the recipe.

Is your -- but you get the sense that your base business is slowing a bit or not really?

And you're still adding a lot of head count which contradicts some of the --

I think in terms of the base business.

One thing, we are definitely looking for more sales productivity from the hires that we've made during the year, especially for sales resources within the first six months, and we've put a lot of focus into doing that, but from a market perspective, we feel pretty good about it.

Okay.

That's helpful.

Thank you and good luck, gentlemen.

Thank you.

Our next question, Jason Ader, Thomas Weisel, your line is open.

Yes.

Thanks.

Andy, could you give us the breakdown by product Big-IP security and WANJet.

You gave it to us total, which includes services, can you give us just the product side?

Historically, we have not given that out.

We normally just give the complete business outfit.

I would guide that it's fairly evenly distributed as compared the total to the product.

Okay.

The WANJet contribution over the next few quarters, do you expect it to ramp from 2 million?

How should we be thinking about that?

I'm almost going to be flipid with this answer in that it would hard not to ramp, Jason.

We did pretty minimal amount of business in WANJet last quarter.

Most of our WAN optimization was actually WebAccelerateor.

The great majority of it was WebAccelerator.

A lot of that software, by the way, so it's leveraging a lot of IP business, but the WANJet business was pretty minimal as the sales force quite rightly didn't focus on it because of the competitive position.

So, yes, we would expect it, but we're not going to give any guidance on that.

Okay.

We're at the early stages now with moving to TMOS.

The EMC relationship has just been announced, and we'll see how that goes.

Last question, can you give us, can you take a swing at what kind of organic growth that you might expect, and when we saw in fiscal 2007 north of 30% organic growth.

Is that a reasonable assumption for 2008?

Yes, we don't give out the yearly growth projections, we only do for the quarter, I'm afraid.

Is there any reason to think that that kind of growth rate, is there anything in the market that could push it up or down I guess would be the way to think about it?

What are the drivers that push that up or down?

Yes.

The drivers, from a competitive point of view, clearly competition would be a driver one way or another depending on how strong or weak it is.

And we feel very, very good about the competitive position.

I mentioned a bit, Montreal is in beta phase.

That is a big deal with it on track for delivery this year.

We think Montreal takes another significant step away from the competition.

We mentioned excitement in Acopia.

We clearly have no new opportunity that we had before with WANJet.

So, there's a number of drivers there that we think could be good drivers.

The March '08 quarter, you made a little bit of a cautious comment on the growth being a little slower.

Do you not expect the Montreal to make a significant contribution yet, it's going to be more gradual on the Montreal?

In my comments I pointed to North America the last couple years, in particular North America slowdown, so we wanted to highlight that in our comments.

Montreal, we said, is going to be out at the end of the calendar year, and we see a lot of excitement around it, and expect it to contribute.

But it will be a slow ramp because it's our high-end box that we're coming out with on the market.

Thank you, guys.

Thank you.

Our next question, (inaudible) of CIBC.

Your line is open now.

Thank you very much.

A couple questions from me.

First, with regards to the business outlook, should we assume then, Andy, if we look at the second quarter, the March quarter of '08, similar behavior to what we've seen into March '07 where you actually had a decline in GAAP earnings quarter over quarter?

I'm looking at it in my guidance, I was commenting on revenue growth, and I -- that's what I do is go back and look at what we've seen in terms of behavior across all the theaters, and that was what I was pointing to in my revenue guidance.

And also just to be clear, what Andy said was a little bit of caution about Q2 because historically in North America we've seen budgets typically in the January quarter being a bit slow after year end.

We did see, and this is really important, that we expect to do sequential growth every quarter in this fiscal year.

Very good, but -- but you don't plan to slow down your hiring because of this potential slowdown in March?

Well, we do that by quarter.

We measure that by quarter, and say what we will do this quarter, but as we move into the March quarter we tend to get a very, very strong improvement from Japan as they come to their financial year end.

There's checks and balances on it, which is why we believe we'll be sequentially up from the December quarter.

Very good.

Andy, just to clarify, when you proforma estimates, do those also strip out the amortization or is it just stock-based compensation you're taking out.

Yes, right now, when I'm talking about the guidance, I'm just stripping out stock-based compensation.

And what we're going to do going-forward is just as with stock-based compensation, I'm going to talk about GAAP.

I will give you the breakdown of stock-based compensation and I will also give out the amortization and may talk proforma if we think it's valuable looking at our business, so you'll see similar behavior there on both of those elements.

Right, but when you talk proforma, will that exclude amortization as well?

No.

Okay.

So just stock based.

John, with regard to the business environment and the upcoming launch of the Montreal, have you seen any of your customers either delay purchasing in anticipation of this product or on the flip side, can you tell us what have you seen from sort of a pent up demand from the channels and customers for this type of product?

Right.

We haven't seen any delay and there may be some, but we don't think it'll be material.

As we said in many calls before, we have a very good track record of introducing new products.

The Montreal is, in a sense, similar to the 8800 from that perspective, and, of course, we did the Buffalo jump transition, so we feel that we know how to manage that.

And the nature of the usage model of our products is interesting anyway in that, and I think I've said this in previous calls, customers, when you buy new products, tend to keep the existing product.

I mean, one of the reasons our service business is so high is we have a massive amount of pre-TMOS service base, they're still using it.

That allows you to have a fairly good transition pass.

The other thing is that Montreal is a pretty big product.

Andy says we expect to be cautious on the rate of takeup of that.

Having said that, to your other question, we have seen some of the very big TELCO internet companies showing very significant interest and in fact they are involved in the beta test, so there is definitely opportunity there, but I think it will be very much at the high end and I don't see it slowing down as a core product.

Would you expect such opportunity s to the take 6, 9 months before they evolve into material -- ?

It depends.

Really depends.

It depends on the customer need, it depends on the beta test.

I really don't want to go there yet.

We're just at the stage of doing beta tests with customers.

Lastly, Andy, could you just give us just this once, perhaps, in your guidance what are you taking into account for Acopia, revenue-wise?

Yes.

Other than giving our expectation for the year of 25 to 30, we don't break out in our guidance what particular lines of business.

And we've never done that in the past.

That's our normal procedure.

What we will do is obviously talk about the results.

Very good.

Good luck, guys.

Thank you.

Our next question, Jonathan Curtis of Nolan Berger Capital Partners.

You're line is open.

Sure.

So the EMC relationship that you announced today for the WANJet, is it fair to assume that's for more data center to data center optimizations and, if so, what are you doing to develop your channel to go after, if at all, the larger branch office opportunity?

And then I have a followup question.

Absolutely, John, this is Dan.

For the MC select relationship, yet it is focused primarily on data center to data center replications, so they use some protocols for their storage systems to move data back and forth and WANJet can significantly improve the performance of those and save people a bunch of costs on bandwidth at the same time.

So, that will gain us access to pretty significant sales force through EMC, through that select program.

And so we believe there will be good things coming from there.

As far as the branch goes, we also announced today the new version of WANJet being available on TMOS.

There are some significant things in that product announcement that really position us well to play in the multi-branch environment.

That's really the piece where we've been standing on the sidelines and sort of watching the market go by with a great amount of frustration internally, but now we're there, we're on the playing field.

The third thing I would highlight is also think about with Acopia in the mix.

Next Friday at the analyst day, we'll be talking about our road map and how having that technology as part of our portfolio can really change the whole WAN optimization game and what's going on in the multi-branch environment, too.

Just back on the branch opportunity.

Do you feel comfortable with your channels that currently exist to go after the branch opportunity or is there some work that needs to be done to get the channel ready or to bring resellers in that have more of that raw networking experience?

I think our channel is pretty well suited to go after that.

When we initially did the acquisition of Swan Labs, our channel was all over those opportunities.

And I know that with a revitalized product coming to them, they'll be right in there again.

So, I think we're well positioned.

Fair enough.

And then just one quick follow-up question.

In terms of the percentage of your boxes, your BIG-IP boxes that go out the door and run pure load balancing and really don't take advantage of some of the more high-end features, have you ever thought about, or you probably have some sense of where you are in terms of attach rate for some more of the advanced features.

Where are we on that right now, and how has that been trending over time?

Yes.

This is Dan again.

It's been trending up over time.

When we look at our customers and the number of people that you think like iRules and we track attach rates internally for the software modules, WebAccelerator, ASM, the performance packs that we sell, SSL, things like that, we're continually surprised by just how many people use the advanced functionality of the devices, so that continues to increase in importance.

And really I think it speaks to the point of where we are competitively that our products offer people just simply a better solution to offload functions that otherwise would have to be written into the applications or performed on the application servers themselves.

So, in terms of an attach rate, is it below 25%, is it significantly above 25%, on terms of the boxes that are shipped.

In terms of iRule, it's definitely above 25% for sure.

Well above that.

In terms of the actual software module attach rates, we haven't been disclosing that.

So, is it fair to assume it's below 25%?

We haven't been disclosing.

Got it.

Okay.

Thank you, guys.

Our next from Tim Long of Banc of America.

Your line's open now.

Thank you.

Two questions, if I could.

Andy, if I could just followup on the sales and sales productivity.

Talk to us a little bit.

You said one of the directives is to increase productivity.

First of all, why do you think it's been lagging behind your expectations?

How do you plan on improving it, and if it does not improve, or improves at too slow of a pace, what does that mean for hirings through 2008?

And then, secondly, on the carrier side of the business, could you talk about that a little bit?

It looked up just up slightly sequentially, but really only up 10% of a fairly tough compare last year.

Any changes there, any concentration issues or any dynamics worth highlighting in the quarter that could have held that business back?

Thank you.

Yes.

On the sales productivity, first of all, we've hired a lot of people very aggressively in 2007, so we are putting a huge focus on basically making sure that they have access to all the tools they need to sell.

There's a whole list of actions to take place under that training, web-based training, good access to references and that type of thing.

So, we're spending a lot of time in that.

And that's -- that's (inaudible) 101.

But we think we can definitely start to see the investment as we do that, but we had very, very aggressive hiring.

Regarding the hiring, remember we do manage our business quarterly, so we take a view on a quarterly basis, in terms of what we're going to say is our target for head count and then we check it weekly and absolutely monthly.

So we're very granular on that.

The TELCO was the last thing.

Regarding TELCO, it was a reasonable quarter.

If you remember, last quarter we talked about some slips.

We did see a fairly reasonable size one slip into this quarter that we thought was going to close.

So we have reasonable confidence it is actually going to close this quarter, but we did actually have one slip.

Most of the others closed.

Meaning closed in the December quarter?

They slipped from September -- I'm talking about one fairly major one slipped into this current quarter, December quarter, the other ones closed before September.

Okay, so that slip could help that business grow as a percent of revenues this quarter?

It's possible.

Yes.

Okay.

Thank you.

Erik Suppiger of Signal Hill, your line is open now.

Good afternoon.

On Acopia, can you tell us what Acopia's total sales for Q4 were?

Yes, we said we did 1.6 million in business.

Was that for the full quarter?

That was just for the two weeks that they were a part of F5.

We're not discussing the full quarter or prior to F5 what their business was.

And you don't want to break it out in terms of what you're assuming for Q1?

We've never done that.

We will give you the -- break it out in the results next quarter.

All right.

And I presume no insights into what dilution that would have in Q1 either?

No, we talked about that we expected, in terms of our operating margin, that it would take it to the mid-20s liked we talked about, still that same range.

Okay.

On the EMC relationship, is there any incentive -- are the EMC sales people incented to sell the WANJet product they're going to have?

Yes.

Absolutely, Eric.

This is Dan.

They'll receive commission and quarter relief on it.

Okay.

So it's just standard product from their perspective?

Correct, yes.

Okay.

How is it positioned?

Is it part of a broader solution for storage replication, or how does it fit into their platform?

Absolutely, it's positioned as a broader part of the solution for them.

So, really with their symmetrics, business and specifically the protocols that those systems use to move data back and forth between the system is where WANJet comes into play to really speed that up and save people bandwidth cost there.

So the way WANJet is being positioned to their field force is as a great tool to be able to go in and solve these tough problems for their customers who are interested in symmetrics.

Did you get access to proprietary protocols that they have that other players in the space wouldn't have?

Yes.

Absolutely.

We worked very closely in joint engineering and obviously, all the testing that goes along with that too to certify the solution.

So arguably, there aren't any other products out in the market that would be able to achieve what you're doing?

To the best of my knowledge, no.

And then lastly, what opportunity is there to take Acopia into EMC?

Is there any overlap with the existing product or VM wear or anything like that?

Are they looking at that as well?

Yes.

I think there's a couple interesting angles to that, largely complimentary in terms of what goes on with EMC.

It does overlap with one portion of their portfolio as well.

But I think as we see that relationship evolve and we'll look and see what happens on the WANJet side, it could be some interesting discussions in the future.

Very good.

Thank you.

Thanks, Eric.

Our next from (inaudible) [Massude] of UBS.

Your line is open now.

Great, can you hear me?

Yes.

Guys, I have a question on 4Q.

Traditionally, you guys are able to beat the guidance and one would expect with deal slippage in 3Q, again, a 4Q, the quarter would be easily beatable.

Can you provide some color on, is there any fundamental change in competitive dynamics over the last 2 to 3 months that may have added total pressure that that led you to come in light with the guidance or high end of the guidance instead of beating it?

We haven't seen any changing competitive nature except from a positive side from our perspective.

I made a reference to those performance tests that we did and we made public.

We're hearing from the field force of replacing most of our key competitors, but I'm include [Sytrix], so in the core we're very, very strong.

Okay.

And just a clarification on Acopia, I'm sure you'll provide more details at the analyst day, but after six weeks of Acopia under the F5 umbrella, you're still sticking with the 25 to 30 million in revenue for '08 and the diluted impact is about $0.15 or 4 percentage points operating margin?

I just wanted to clarify that.

Yes.

It's still at the same guidance.

As we go forward, we're increasingly positive about the Acopia story and integration and our ability to manage expectations but, for now, that's our guidance that we're putting out there.

Thank you.

Our next is from Mannie Recarey, Kaufman Brothers.

Actually, my question was just asked.

It was on the evolution of Acopia, was there any change there.

Thanks.

The next is from Cameron Cooke of Janco Partners.

Your line is open.

Could you talk about or expand on the increase in win rates with integrators and how that dove tails with your sales force productivity?

Sure.

This is Dan, Cameron.

In terms of integrators like CSC, EDS, some folks like that, we're seeing definitely an increase in business with that.

Many of the projects that they work on are pretty big and take a while to percolate through the system, especially some of the larger government ones.

But that is definitely increasing for us as a part of our business.

And does definitely help, in terms of the sales productivity for that part of our business.

So that was a function of sales that we're already in the pipeline?

Is that right?

The more of it they bring to us, that's the beauty of the system's integration, because they may be in control of a very large project or they're outsourcing the project, and once you prove you get -- you earn some trust with them and some loyalty, they tend to bring you into market schedules.

A good example of that is a law of system integrated business.

In fact the one of the sales conference that's been held this week, I won't mention who, but one of the big systems integrator is actually speaking to our sales force about the joint companies we've been doing.

Since you now support cash on the WANJet project, can you talk a little bit about a gap analysis relative to Riverbed maybe and the sale cycle on that product?

Hi.

This is Karl.

Just real quick.

What we feel with this recent release is this cash in TMOS is this allows us to actually execute well in the branch office.

By no means are we necessarily on a one-by-one feature parity basis comparable to the Riverbed feature set at the moment.

However, the joint solution between the WANJet and the Acopia ARS actually gives us some advantages where we can do file optimization based on locality at the branch office itself.

So, we see some unique aspects of this solution that actually gives us advantage over necessarily supporting other types of proxies that are available of the Riverbed products themselves.

We'll go through this in a lot of detail next Friday in New York.

Sounds like a great product.

Thanks.

Our next is from Rohit Chopra of Wedbush Morgan.

Your line is open.

I have three questions.

The first one is, can you just talk about linearity?

How backend loaded was the quarter compared to last year or the year before?

I can tell you in a it was pretty consistent with what we've seen historically, we were a little less than 50% in the 3rd month.

I don't have the information in front of me, but I think it's pretty consistent with the last couple years.

Okay.

So no change there.

And then -- I'm going to ask you an Acopia question.

I think this is simple.

Can you split out the revenue that you indicated for Acopia between products and services?

For this quarter?

No, we're not going to do that.

And then I had a question for Chris Lynch, and this is just based on an article he was quoted in Dow Jones a year ago.

I just wanted to understand what impeded the progress to break even for the business last year, and how does F5 change the equation?

I think that -- I don't view that we had any impedance that didn't drive the relationship.

I think we have a significant technology advantage, and we have to weigh our options to growing into the market.

And when we looked at creating our own channel, both direct and indirect, and the time it would take to do that and the money it would take to do that and the opportunity to leverage a brand and a channel like F5, we thought it was an opportunity we couldn't pass up to take advantage of the lead that we have in the market with our technology, and that was really what drove us as opposed to any sort of financial metrics that I was looking at independently.

Thank you.

Our next, Ken Muth of Robert Baird.

Your line is open.

Hi.

Thanks.

Andy, you mentioned as you're going through the sequential growth through the year and Q2 a little bit slower that by the end of the fiscal '08 your gross margins will be back at more of a historical level implying kind of a 78% number.

Can you imply also with that comment your made that your operating margins would get back to the same level?

When I was talking about the gross margins in particular, we spent a lot of time on F5 improving our gross margins over time.

Those are efforts that will continue and we think we'll get advantage from that.

We're also going to apply that to Acopia.

So, my comment there was looking at the combined organization now, working both sides there we believe we can get back up to those historical levels.

I wasn't meaning to imply that operating margin would get back to historical levels at that point, but we will see them improve through the year.

We will see them improve through the year.

Right, and also remember, the obvious metrics here are 12 line revenue, the gross margin.

We talked about both of them.

We think we can get the growth margin up.

And the meter on operating margins head count.

So the operating margin is going to be very, very much linked to the decisions we make during the year, in terms of investment and head count.

Okay, but then just -- as you exit fiscal '08, you would expect that kind of gross margin level even with the Acopia, I assume you're talking on a combined basis, that you would call it a 78% gross margin?

We're usually between 77, 78.

When I talk about historical levels, that's what I'm referring to, so that 1% range there.

Okay.

Thank you.

Yes.

Our next question from Troy Jensen of Piper Jaffray, your line is open now?

Good afternoon, gentlemen.

Quick question for Andy here.

Could you give us Acopia expenses in the quarter?

For Q4, Troy?

Yes, please.

I don't know specifically what they were, but roughly --

8.5.

With our revenue and their gross margin, which we've said has been in the low 60s, it was roughly break even.

Okay.

And then how about a -- I guess ultimately what I would love to know, what was gross margins or operating margins be ex-Acopia in the quarter?

Do you happen to have that with you?

For Q4, the effect Acopia was was pretty small.

I think we're right around the 29% level.

Okay.

Perfect.

Last one on financials, just one for John then.

I think, what, 10.2 million in stock-based comp here in the September quarter, correct?

Yes.

Now, you guided for next quarter it was 14 million of stock-based comp?

It's 14 million in op ex and then approximately 1 million for Coggs.

So I guess why the 5 million jump in stock-based compensation?

The majority of it is we do our annual grant in August and we did that.

We also had Acopia come on board which has attributed to the increase.

And, to a small extent, just our overall head count growth aside of that.

All right.

Fair.

John, I apologize if I missed this, but do you have any update on how BIG-IP 8800 performed in the quarter?

Maybe 8400 and 8800 I'd be interested.

We didn't -- we don't break out the revenue by product.

Just generically.

My introduction was we're very happy with the 8800, and the interest level with the large enterprises with the TELCOs and the large internet company, it's been pretty good.

And 8400 similarly, but the 8800, obviously the flagship is the key one for those big customers.

All right.

Good luck, guys.

Troy, just one last point if you didn't pick it up in my comments, was that we expected the stock based compensation to remain at that level until our next annual grant in August.

Got you.

I just thought of another one, if I could.

Could you just regive us the U.S.

fed and overall government numbers?

I just missed it.

Yes.

U.S.

fed was 7%, and overall was 12%.

Perfect.

See you next week, guys.

Our next is from Ehud Gelblum of J.P.

Morgan.

Your line is open, sir.

Hi.

Thank you very much.

Most of my questions have been answered.

A couple questions, though, Andy, you reiterated the guidance for top line for Acopia for next year.

On the original conference call, you had also given guidelines.

I assume they are still consistent, but just wanted to make sure that's true of low 60s gross margin, and I think you were talking around 8.5 million in op ex per quarter.

Is that still what we should be looking at unchanged for next year?

Yes.

Okay.

Great.

John, when you're looking at -- you said you do the hiring on a quarter by quarter basis, a lot of hiring this quarter, 385 new employees.

Should we expect that given the levels of efficiency you're seeing out of them, should we expect that to come down next quarter?

And maybe take a quarter or two as you do digest these before you continue hiring or do you expect to continue hiring at this new hire pace now?

First of all, there's 225 in the last quarter, I think was the number, that's one thing, and then obviously that included Acopia, so, just by definition, we wouldn't expect the same number as we move in.

We actually gave some guidance on that for this quarter which was I think was between 60 and 80 this current quarter.

I apologize, I was looking at the wrong numbers.

And you expect that again to be -- is that perhaps geographically split in any way, a little stronger in Europe or Asia?

Or across the board?

I think the breakdown of it will be consistent with what it has been in line with our breakout of revenue, and we'll -- we'll -- we get pretty granular on that as we go through the quarters, if we see more opportunity in one theater, we'll make a shift.

For the most part, it's pretty evenly distributed.

Okay.

Helpful.

Two more things, you mentioned again that after the gross margin takes a dip on the addition of Acopia, it should come up to historical levels.

What are you basing that off of?

Is that volumes of Acopia, getting more efficiency from your suppliers or is that -- do you expect costs to come down in the Acopia products or do you expect pricing to get a little firmer as time goes on?

What will bring the -- I assume Acopia does nothing but become a larger percentage of your revenue as time goes on if all goes well.

So, how do you get the margin back up again?

Just to be clear on what I said.

We think those will drop down about a percent, that was our guidance, and that we'll see them improve through the year.

It's a numbers thing.

We think we can solidify pricing and lower discounting that we seen there, the supply chain issues, we're constantly working on new platforms that we'll come out with.

All those things lead me to believe that we'll be able to get back to historical levels, we'll still keep focused on improving margins on the F5 side as well.

The combination of those two, we'll get it back up to historical levels.

Right, but your F5 gross margins have been rock solid for a long time?

Yep.

You have been doing a fabulous job over there.

There's not much more you can do there.

On the Acopia side, it sounds as though better supply chain management than they managed to do on their own and lower discounting?

Had they been discounting in the past and you expect that to be able to go away?

Am I understanding that correctly?

I don't have facts and figures on it, but as a start-up company in a (inaudible) market, I think at times you have bigger discounting and talked about that and we see ways to improve that given the combined company and the strength of the F5 brand.

Okay.

Great.

And, Chris, while you're here, it would be great to ask you a question.

I am assuming you agree with this top line that Andy's talking about from you for next year.

When you look at that and you look at your competitors, several of which have been bought over the last year, year and a half by larger companies as well.

Do you expect -- what kind of share do you expect that 25 to 30 million to be?

Do you expect to be 50% of the market or do you expect to be still a small player in a $200, $300, $400 million market and someone else is getting a lot and gives you a lot of opportunity to grow, or do you think you'll be defining the market and that 25 to 30 will be the 600-pound gorilla in this market next year?

My view is that we are the market leader today.

And the market has been small but growing, and we see significant momentum in the market growth.

And we will maintain our leadership position.

And by doing that, obviously we'll enjoy significant growth as the market grows.

I mean, you'll see this next week, when we talk about it in detail.

I know Chris is going to present.

But this is a NASN market.

Talking about market share, I wouldn't say it's premature, but it's very, very (inaudible), but what's interesting to me, you'll feel for this next week, if you look at the Acopia store base, for example the financial vesical in New York, it's pretty amazing.

I mean, they almost own it.

So obviously that's not the whole market share, but they have some really, really premium customers.

You'll get a better feel for that next week.

Okay.

Appreciate it.

Lastly, John, when you said financials were slightly weak, was that essentially in your application acceleration and any types of related areas?

Or have you seen the financials, perhaps, in general overall?

That was the overall budget spending.

Across the board, seems like financials are a little weak summer.

Yes, not a lot.

But a little.

Okay.

Interesting, thanks so much.

See you next week.

Our next question is from Matt Robison, of Ferris, Baker Watts.

Your line is open.

Hi.

Thank you very much.

Actually, all of my questions have been answered, good luck.

Our last question at this time from Paul Mansky of Citigroup.

Your line is open.

Thanks, in under the wire.

I wanted to go back to the WANJet EMC for a second.

I know SRDF is kind of a bread and butter application over there, so being brought into the party there is certainly a validation of your products, so congratulations on that.

The question is, I'm wondering if you're ever approached or if you would consider to take that select relationship to actually a branded relationship with EMC via their connectrics program.

Paul, this is Dan.

First step, select, we'll see what happens from there, but certainly that's what we got today.

Yes, we haven't had any discussions about that, and we're pretty comfortable with what we've got.

Great thank you very much.

Okay.

Well, thank you all for joining us on today's call.

And we hope we'll see many of you at our analyst meeting in New York next week.

Thank you, now.