F5 Inc (FFIV) 2008 Q1 法說會逐字稿

Good afternoon and welcome to the F5 first quarter fiscal results.

(OPERATOR INSTRUCTIONS) I would like to turn the call over to your host, Mr.

John Eldridge, Director of Investor Relations.

Thank you, sir.

You may begin.

Thank you, Catherine.

Welcome to our conference call for the first quarter of fiscal 2008.

The speakers on today's call are John McAdam, President and CEO; and Andy Reinland, Senior VP and Chief Financial Officer; John Rodriguez, Senior VP and Chief Accounting Officer; Chris [Lynch], Senior VP of Data Solutions; and Dan Matt, Senior VP of Marketing; Karl Triebes, Senior VP of Product Develop 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 our website, www.f5.com.

In addition, you can access an archive version of today's live webcast from the events calendar page of our website through April 23.

From 4:30 p.m.

today until 5:30 p.m.

pacific time January 25 you can listen to a telephone replay at 866-357-1405 or 203-369-0111.

During today's call, our discussion will continue stain 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 press release and described in detail in our SEC files.

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

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

Thank you, John.

For the first quarter of fiscal 2008, we achieved revenue of $154.2 million, within our guided range of 154 to 156 million.

These results reflect 6% sequential growth and 28% growth on a year over year basis.

Book to bill for the quarter was greater than 1.

Although revenue was at the low end of our guided range, we delivered GAAP EPS of $0.21 per share at the upper end of our guidance of $0.20 to $0.21 per share.

Excluding stock-based compensation expense, non-GAAP EPS was $0.33 per diluted share.

Product revenue of $110.2 million represented 71% of total revenue.

Service revenue of $44 million was 29%.

On a geographic basis, the Americas represented 57% of revenue, EMEA accounted for 21% and Japan and APAC each represented 11%.

Beginning this quarter, we are changing the way we discuss revenue on a product line basis to be more consistent with the way we manage, analyze and forecast internally.

As a result, we will na longer break out application security and WAN optimization separately, but will begin including this revenue within our core application delivery networking.

We believe this provides a more appropriate view of our overall business.

With that in mind, Q1 revenue from our core ADN business was 139.4 million or 90% of total revenue.

In its first full quarter with F5, Acopia contributed 7.7 million of total revenue from the ARX product line, 5% of total revenue.

Revenue from FirePass was 7.1 million, also 5% of total revenue.

Looking at revenue by vertical, the finance sector comprised 23% of total revenue, up from 17% in the prior quarter.

[Telco] and service providers represented 23% of total revenue, and the technology sector was 18%.

U.S.

federal accounted for 3% of total revenue, below expectations.

During Q1, we had two greater than 10% distributors, Avnet Technologies, which accounted for 13.9% and Ingram Micro, which accounted for 11.5%.

Moving down the income statement, GAAP gross margin in Q1 was 77.1% excluding approximately 1.1million of stock-based compensation expense; non-GAAP gross margin was 77.8%.

GAAP operating expenses of 95.9 million were within our target range of 94 to 97 million.

This includes 14.3 million in stock-based compensation expense.

Our GAAP operating margin was 15%.

Our non-GAAP operating margin, which excludes total stock-based compensation, was 25%.

Our GAAP effective tax rate was 39.1%.

Excluding stock-based compensation, our non-GAAP effective tax rate was 35.2%.

On the balance sheet, cash flow from operations was 42 million, and we ended the quarter with 517 million in cash and investments.

Accounts receivable DSO ended the period at 58 days.

Inventories at quarter end were 10.2 million.

Deferred revenue increased 9.6% from the prior quarter to 110.2 million.

Capital expenditures for the quarter were 4.9 million, and depreciation and amortization expense was 5.5 million.

During Q1, we increased our head count by approximately 45 people, ending the quarter with 1625 full-time employees.

Moving on to the second quarter outlook.

As discussed during our October conference call, we continue to believe that we can achieve quarterly sequential growth throughout fiscal 2008.

We also noted that we have historically seen seasonal softness during the March quarter in North America.

With these factors in mind, combined with the current macro environment, we are targeting Q2 revenue in the range of 158 to 160 million.

We expect GAAP gross margin in the 76 to 77% range.

This includes approximately 1 million of stock-based compensation expense.

We expect operating expenses between 97 and 100 million, including approximately 14 million of stock-based compensation expense.

We are forecasting our effective tax rate at 39%.

Excluding stock-based compensation, we expect our non-GAAP effective tax rate to be 35%.

Our GAAP EPS target is $0.21 to $0.22 per diluted share.

Excluding stock based compensation, our non-GAAP EPS target is $0.33 to $0.34 per diluted share.

Our current plan is to add 30 to 50 employees for the quarter.

We estimate DSOs will be in the mid to upper 50 days range.

We expect inventory levels within a range of 12 to 13 million.

And we believe our cash flow from operations will be in excess of 30 million.

This reflects lower cash flow from operations than in the prior quarter, a result of seasonality in our U.S.

federal tax payment schedule.

Finally, as we announced in today's press release, our Board of Directors has authorized a 200 million stock repurchase program.

This move by the board underscores management's confidence in the fundamental strength of our business and in the company's ability to grow sequentially throughout fiscal 2008.

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

Thanks, Andy, and good afternoon everyone.

With our Q1 results, the F5 team has now delivered sequential revenue growth every quarter for the last five years, with Q1 being our 20th in a row.

From our geographic perspective, the start of the quarter was (inaudible) which delivered strong performance across the region with some excellent large customer wins.

In the U.S., enterprise business and our core application delivery networking market was up modestly from the previous quarter, and this was combined with strong growth with the Acopia ARX products.

U.S.

federal, on the other hand, was relatively small during the quarter and below our forecast.

Similarly, we experienced slowness in Japan and APAC, both of which were down sequentially from the previous quarters.

We expect to return to sequential growth in federal, Japan, and APAC this coming quarter, and I will comment more on that when we discuss guidance.

Once again, our professional services business delivered solid growth.

With yet another significant increase in deferred revenue which bodes well for continued growth in services throughout fiscal 2008.

We also saw continued increase in customer satisfaction levels from our customer base as we maintain our investments in the service organization and product quality initiatives.

I was delighted with the first two quarters of business from a new ARX range of file virtualization products which were added to our portfolio with the Acopia acquisition.

We acquired a terrific team at Acopia, and I'm very pleased with how quickly we have progressed in this integration.

Not only did we exceed our internal forecast, but the quality and number of large new business wins was very impressive.

File virtualization is a (inaudible) market opportunity with a very strong value proposition for reducing (inaudible) and capital spending and large enterprises.

We believe the ARX range of products are best of breed, and we intend to take advantage of this opportunity by accelerating our integration plans and ramping up sales of ARX through our current F5 channel.

Our goal is to complete ARX sales and product training for our entire sales force by the end of the second month of this coming quarter.

Given the ARX sales momentum we experienced in Q1 combined with a growing pipeline for the ARX file virtualization products, we expect revenue to exceed our original estimate of 25 to 30 million for fiscal 2008.

We continue to be pleased with the ramp of our web accelerator and ASM software module sales which were responsible for leveraging significant BIG-IP sales last quarter.

Also, we are starting to see more activity and a bigger pipeline of WAN optimization opportunities, especially through our EMC partnership, though this opportunity is still in early days.

From a product perspective, today marks one of the more significant milestones in the company's history with the announcement of our new flagship VIPRION product known internally as Montreal, VIPRION with its revolutionary chassis based multi-blade architecture delivers exciting new functionality and performance capabilities that set a new bar for the industry and significantly increases F5's technology leadership in the application delivery networking market.

VIPRION is the world's first on-demand application delivery controller solution.

Customers can now turn up performance without any network changes.

VIPRION provides multi-level redundancy for high availability mission critical applications.

To date, the modular portion of the layer 4 to layer 7 market has been dominated by (inaudible).

We believe VIPRION will gain share in that market over the next few quarters and F5 will become a key player in the modular space.

We also believe VIPRION provides an unmatched offering for the web monster service provider and large enterprise markets where they have experienced 90 to 100% increases in Ethernet traffic over the last couple of years.

With its significant performance advantages and pricing structure, VIPRION is extremely price competitive.

For example, for SSL solutions, the equivalent [siscal] 16 GA solution is three times more expensive, requires four times more management, consumes 65% more watts, and uses 70% more rack space.

Given the sophistication of the solution, we expect VIPRION sales to be modest in the coming quarter and start ramping if the second half of fiscal 2008.

In his guidance, Andy has indicated that we believe our sequential growth will continue this quarter and throughout fiscal 2008.

We also indicated in our October call that from a seasonality perspective to expect some seasonal weakness in North America enterprise, which we expect to be roughly flat to slightly down over last quarter.

EMEA had a very strong Q1, so we are not expecting sequential growth from EMEA in Q2.

We do, however, expect to see healthy sequential growth in Japan this quarter from fiscal year end business.

We also expect to see growth in APAC and our U.S.

federal business.

As I mentioned earlier, our services business should also deliver solid growth in Q2 as well.

Clearly, there are uncertainties and concerns about the state of the global economy, and the impact of this could have an IT on overall capital spending in 2008.

We do not treat these concerns lightly, but we do believe that the compelling value proposition of our core application delivery controller and our file virtualization products place F5 in a position where we can deliver continued growth throughout the year.

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

(OPERATOR INSTRUCTIONS).

First question from Troy Jensen, Piper Jaffray.

Good afternoon, gentlemen.

So a couple of questions here, start finances with Andy.

Could you frame-up maybe how much of Acopia revenues fall under financial services?

I guess I was surprised to see financial go from 17 to 23% in the quarter here.

Yes, historically we haven't broken out our verticals by product line.

But I'll tell you that Acopia is strongly in the financial sector.

Okay.

Okay fair.

Andy kind of same thing.

I know you are not going to give specific guidance, but what is your sense for financial services this year?

Obviously your core business, do you think that is in a situation where financial vertical will be up for you guys this year Xing out Acopia?

Hi, Troy.

It's John here.

Obviously we have been watching that really, really closely.

In fact, frankly, all of the enterprise businesses we come up with guidance for this quarter.

And first of all, we've got pretty compelling value proposition for finance, both with the Acopia and with the BIG-IP.

We didn't see any significant down turn last quarter, but clearly we are watching it.

We believe we have taken up pretty conservative view overall in terms of U.S.

enterprise, including finance and the guidance.

We have done that by looking at bottoms up forecast, we've done that by looking at the pipeline and where the projects are in terms of buying cycles.

So I think we've got it under control, but clearly we are taking a reasonably conservative view.

Okay.

And then last one for you, John.

Montreal released today.

Can we expect it's just going to be like Beta site conversion here in the March quarter for revenues?

Yes.

I see it in the script here.

We do think it will be pretty modest yes, absolutely.

We now evals ongoing.

So evals are happening as we speak.

We do expect to see revenue, but we think it will be modest.

It's a pretty sophisticated solution.

It is a nontrivial deal for a customer to make this decision.

The value proposition, during the second half of the fiscal year, there is something when you see the materiality of the product.

Okay.

Is it safe to say sounds like to six to nine months, given the complexities of the system?

No.

I think what will happen is that you'll see -- we'll move into eval phase at the beginning.

That's because it's a totally revolutionary architecture, high availability, the performance starts we are giving with it.

So that would be an eval.

Once that gets proven, that gets run through pretty quickly and think you'd see the sales cycles -- I would guess, and this is very subjective, but by the end of the fiscal year the sales cycles will probably be similar to the high end of the BIG-IP.

Okay.

Well, keep up the good work, guys.

Next question from Samuel Wilson, JMP Securities.

Good afternoon, gentlemen.

Two questions I guess mainly for John, but anybody can fire in.

Just want to get a sense on the wireless Telco side, what you thought the general tone of business was there and if you're seeing any sort of change in the environment.

Secondly, John, you mentioned you are aware of the economic situation and cautiousness about the stock market.

How are you feeling in general about sort of wanting that grow head count wanting to expand the business over the next four quarters?

Sort of what's your thought process going into '08?

Let me answer that first of all, Sam, and then Dan can actually talk more about the wireless and the Telco.

The answer is absolutely more cautious.

If you look at the head count that we added in the quarter just finished, it is clearly below previous levels.

That is because we keep an eye on the pipeline, we keep an eye on delineality, and we keep an eye on the operating margin and they're still very, very important metrics for us.

If you look at the guidance we have given for this quarter, again we view it reasonably conservative.

What we're not doing is cutting back.

We are still growing and we still see the growth.

Definitely cautious optimism I think would be a good phrase.

Got it.

Sam, as far as the wireless piece, this is Dan, we actually saw in the mobile portion of our service provider business actually some good strength within that.

We are seeing ourselves being deployed in front of more and more revenue generating applications, and that is in contrast to some of the more the traditional providers where we saw the lockdown occurring over the holiday period and their spending slow down to what we had seen previously.

Also in the mobile space, too, we're seeing interest in the VIPRION product, too.

So we have good aspirations there.

Yes, some of the evals that are going on right now are specifically mobile related.

Perfect.

Thank you very much, gentlemen.

Our next question from [Ati Kidron] CABC.

Hi guys.

Congratulations on a good quarter in a very nervous environment.

Andy, can you give us a little bit of color on the buy back?

Is that going to be automated or are you going to have full control on how you execute it?

What's your thought process behind that?

Well, the board has authorized to use an open-market plan and we're currently developing that plan with our advisor, so it will be under a plan that we set forth based on stock price and volume.

We are going to make it active as soon as we can.

Okay.

That's good to hear.

With regards to your guidance for the March quarter, is it fair to say -- it seems like your service revenue is really growing nicely outspacing products for four or five quarters now quite consistently, assuming (inaudible).

Should we actually think about product revenue declining quarter over quarter going into March?

No, I don't think so.

At all.

I think if you look at all of our products in total, we expect to see growth there.

Okay.

And lastly, with regards to Acopia, very nice job on the top line.

Also fair to assume that the return, your accretion or back to break even in that business are also ahead of schedule?

Yes, I think that's fair to say.

As long as we moving forward.

As John said, we expected that we'd be disappointed if we didn't exceed the 30 million.

We're investing in Acopia but continue to manage it closely and realize that we're managing an entire business here and will do so as we go forward, but that would accelerate the break even there.

Okay.

Lastly, maybe you comment on the increase in the accounts receivable.

How do you think about that going forward?

The DSO at 58 days, actually our accounts receivable are very clean, very current.

The make up there hasn't changed at all.

The increase in our deferred revenue affected that to some extent, and some of our international business.

But we're for the concerned with it.

We think it will probably stay in this mid to high 50s day range going forward, and we're very comfortable with that.

Very good.

Good luck, guys.

Our next question from Mark Sue, RBC Capital Markets.

Thank.

John, any anecdotal comments from your North American customers on their spending plans for this year, perhaps their willingness to sign purchase orders?

Back end loaded spending might be overall?

Not really.

We actually completed the U.S.

quarterly business review.

We did that last week.

That was a fairly significant process for us, in terms of getting a view of the business.

We have all the sales management going through the forecasted data as well as what happened last quarter.

We did see some deals pushing last quarter, no question about that.

We did see that.

Most of the feedback we got on that was that we do expect to see it in this quarter.

But we didn't see a significant difference.

We did see some deals pushing, and just by definition that means there was some lengthening of our sales cycles, and I think we've taken up pretty conservative view given that data.

Got it.

John, how are you feeling about the overall sales force productivity all the folks you have hired over the last six to nine months?

Obviously we want to increase.

That is a no-brainer answer.

We want to see that increase.

The reality is that I think that has been cushioned somewhat by the environment we are in, but I think over time you are going to see it increasing.

Are you seeing some delta as of yet?

Or more work in progress?

It's work in progress.

Lastly deferred reference news, usually you have a higher rate of growth there.

Any thoughts?

No.

Even at 9.6%, we felt that was very strong and in line with what we were expecting for the quarter.

We certainly haven't seen any difference in the attachment of maintenance contracts or yields.

All those metrics look really good.

Got it.

Thank you, gentlemen.

And good luck.

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

Good afternoon.

Most of my questions have been answered.

But I would like to get the numbers for central and maybe ask you to comment a little bit on how the gross margins for ARX compare to the rest of the corporation and maybe, if it's possible, to do a quick version of the value proposition for ARX since you are selling into a tough vertical with these financials, and you did mention in your release that you did imply that the value you bring to the market maybe gives an economic alternative to your customers in tougher times.

Yes.

Actually let's answer that first.

Chris, did you want to answer that one?

The value proposition?

Yes, go ahead.

Chris is in Boston.

So I guess we have a connection problem.

Can you hear me?

Yes.

Okay.

So the Acopia air ex platform saves customers typically 50% on their capital and operation expenses related to the storage of unstructured data.

So it's a compelling CapEx op ex story.

We find with tightening budgets, there there is more demand in interest for the deployment of virtualization at the file layer because of that.

That is a pretty quick elevator pitch.

I think it only took me to the fourth floor.

What about the gross margins in the DevCentral?

On the DevCentral front, Matt, we are at 21,833, so we're still seeing good growth in registered users there.

For the gross margins, we made great progress over the quarter just bringing in Acopia as part of that five and immediately being able to impact those.

That being said, we still see some room for improvement, to get it up to our kind of standard 80% level for our overall products.

And the DSO, I guess it was really not up a lot sequentially.

A little bit.

Did you see some back loading or was it pretty linear in the quarter?

Our linearity was pretty consistent with last year with 50% in the third month.

Went up about a day.

Not much that concerned us there.

Okay.

So on that gross margin, you mentioned getting it to 80%.

It that a reasonable goal or is it more of a traditional kind of a switch around kind of a margin?

Given the value and comparing it to our overall business, we think it's reasonable.

We're not going to get there overnight.

We are going to integrate them into our gross margin task force and go after each element of improving the gross margin as we can.

But we do see the opportunity to get it up.

Our optimism to get up there is pretty high.

Good.

Okay.

Our next question comes from Bill Choi of Jefferies.

Okay.

Thanks.

Several questions.

First, on the U.S.

federal business, could you talk about what's happened there?

Were any deals slipped there that you have some high confidence that it will close this quarter to give you that up?

Then I have a couple more.

Yes, no.

We did see a number of deals slipping actually.

All related to budget issues, not competitive, really budget issues where effectively we won the business and just trying to push it through the system.

So we did see that.

If terms of our optimism, that's related to two things.

One is, do we believe these deals can happen in this quarter and with the majority of them, not all of them, but majority of them we do think that.

Also the pipeline getting bigger as well.

And quite frankly, the comparison gets a lot simpler.

3% of our overall revenue is up, a pretty low watermark for a federal business, so we definitely expect that to get back to more normal levels.

Can you discuss the same thing on Japan?

Very similar.

The difference with Japan is that this is a fiscal year end and typically we see a strong business at the fiscal year end and that's why we feel good about the forecast.

We also had a specific issue in Japan last quarter with one, some reorganization was on one of our big partners.

That's done.

So we expect that issue to be over, but really as the fiscal year ends that gives us the optimism a longer course with the pipeline forecast.

Right.

Then just trying to get a sense for your guidance here.

Obviously you did mention several deals slipping.

Would you say that embeds like half of the deals getting done in the quarter?

Or is that a higher percentage?

Some thoughts around the guidance there?

I think our process on our guidance was similar to how we always approach it looking at the pipeline, going through our QVRs with our sales people and developing a range that we feel comfortable we can achieve.

Okay.

And then a question on VIPRION.

It's a pretty sizable box, as you guys mentioned.

How are you looking to roll that out?

Is it all going to be direct sales or are you looking to leverage some of your VARS and other channels and how soon would that occur?

This is Dan.

Absolutely we are going to be leveraging our existing channel partners for VIPRION.

The initial evals that we've been doing, obviously a lot of hand holding we are doing directly.

But our goal is to have our channel be able to handle it just like the other products.

Is that largely OEMs like mobile OEMs or are you also going to your regular enterprise at [VARS] and when would that happen?

It'd be through our regular enterprise [VARS] and that's in the process of happening right now.

Okay.

Great.

Thanks.

Our next question comes from Ken Muth Robert Baird.

Hi.

First of all, could you give us the worldwide government number just for comparison of what you did there versus just the U.S.?

All government was 7%.

Okay.

Noticing [Sisko] came out with stuff yesterday or the day before in layer 4 through 7.

How do you look at the competitive positioning now?

They still kind of look like that's a more of a low to mid end product, you guys are moving up more in the high end.

Do you expect to run into them less or how would you kind of judge the comparisons right now?

Yes, Ken, this is Dan.

They did introduce some they called the 4710 yesterday.

That's their sixth product in this space they have come at us with.

I believe that also makes it the fourth architecture that is currently offered for sale.

Anyway, so when we look at that, in going through what they're building up, what the product's capable of, we feel really good about our products when we compare to things like our 3400 out there.

With things like the web accelerator and pieces like that that we can offer against it.

We think we're in a really, really good position.

Obviously, at the high end it doesn't touch anything we have got.

So it does make for some good, interesting news out there.

It's been available to some customers for some number of months now.

But we really haven't been encountering it all that much in the marketplace.

So we are equipping our sales force to be able to deal with this, just like many other [Sisko] announcements that we have seen.

Then on the competitive front, too, we heard in the news yesterday that Juniper is pulling the DX platform, which is their red line acquisition out.

So we're going out to our channel partners with an aggressive trade-in program for people that may be stranded by that as well.

Okay.

And then just a followup on the WAN op.

John you talked about the Montreal kind of ramping the second half of this year.

What would be your expectations or hopes for the WAN product line ramping?

Pretty similar.

I think the main focus we've got there is really twofold.

One is the EMC relationship, and I mentioned the pipeline is growing there and I think that's a good opportunity for us.

And then the second area is that we have integrated the one optimization WANjet products under the data solutions group, which also, running under Chris [Lynch], that includes Acopia products as well because we see some synergies there.

Yes, I think it's very similar second half.

Great.

Thank you.

Our next question is coming from Sanjiv Wadhwani from Stifel Nicolaus.

Thank you.

Congratulations on a good quarter.

Couple of questions.

And you might have answered this.

I have been on and off the call.

But as far as March quarter is concerned for the core business, Xing out Acopia, are you expecting that business to grow?

And what sort of growth rate should we look at for Acopia for the March quarter?

Remember we don't normally break out the guidance there by product line.

We do expect (inaudible) to grow, yes, we do.

Okay.

I did say that North America we're expecting to be flat to maybe slightly down, but we see growth in other areas.

And EMEA given it had such a solid quarter, we don't expect to see much sequential growth there either.

Got it.

But both businesses should grow basically sequentially?

Well we don't give out guidance.

Yes.

Right.

Yes.

And in the pushouts that you mentioned, is that happening sort of primarily services?

Is it particular industries across-the-board?

Any sort of color that would be helpful?

Not really.

It was pretty much across-the-board.

And it wasn't, I mean, you need to put this in perspective.

It wasn't 50% of our business was pushed out or anything like that.

But we did see more than normal.

Where we tend to see that is one of the key metrics for us is we look at the fact of the pipeline, in other words the fact the pipeline we think there is a high probability of it all happening and we have percentage that we look at in a quarterly basis.

We did see that dropping a little bit last quarter.

That's why we've taken that conservative view for this coming quarter.

It was pretty much across enterprise.

Got it.

One last question, [Sisko] obviously continuing to not deliver a good enough product, and given sort of macroconditions, are you seeing them play any unusual pricing games or not really?

Not any different from the last five years.

Nothing different?

Okay.

Perfect.

Thanks so much.

Our next question comes from Rohit Chopra Wedbush Morgan.

Few questions for you.

The first one is, can you kind of go through the geography and talk about the sales cycle?

I just want to see if there, is there a change in the sales cycle as you go around the different geographies that you have noticed over the last quarter?

Not noticeably by geography.

We haven't seen any shifting -- significantly shifting patterns.

Okay.

And deal size in the quarter?

Is it starting to move up, staying stable, where is is that trending?

It's actually been moving up.

I don't have the exact number.

But we have been seeing it go up.

And definitely with the inclusion of Acopia and their deals and deal sizes, we're going to see that go up.

Obviously with VIPRION as well.

I think you are going to see the deal size continue to go up.

Over the foreseeable future, actually.

Do you want to just talk about your partners?

Microsoft, Oracle, or SAP, other maybe some other big people that you're working with.

I want to get a sense of what they're doing.

Are they slowing down, are they helping?

What's going on with some of the big partners?

Yes, Rohit, this is Dan.

I think if terms of what's going on with the other partners, we're a microcosm obviously of their larger business.

We continue to see enthusiastic cooperation with us.

Take Microsoft as an example.

We released a white paper that we talked about in the last call talking about how we can accelerate share point or the performance of share point deployment.

That got picked up and turned by Hewlett Packard, who is one of the largest deployers of share point in the world.

And now we are finding ourselves invited to share point user groups all over the place.

North America.

So we are seeing, and I could give you similar stories on Oracle and SAP.

We continue to see great enthusiasm there for what we are doing to help with their applications.

So really no change in the quarter.

You are not seeing any different trend as you begin January or anything like that?

No.

That's correct.

Okay.

And then I wanted to try to understand something with VIPRION.

As you move up market, do you -- is direct sales still involved at the lower end?

Or do you do you shift people to the higher end?

Does somebody else take over the lower end?

Do you push that out to the distributors and resellers?

What happens?

I think with VIPRION there is no question there will be more direct touch.

In other words, our sales force will be involved more typically than they would be.

But we still expect it to be very, very much a partner product through the channel.

We will assist the partners, especially in the first six to nine months as a ruling of the product.

But just like the 8800 that is very partner friendly, so is VIPRION going to be as well.

Right.

I think what I was trying to do is get a sense if you're vulnerable there to any competitive forces at the lower end to try to grab share from you as you start to move upwards.

That's an interesting question.

We have put a lot of focus into that area right now.

We think we could be doing better in the lower end and we think there is more opportunity there.

And we are doing things about it now.

We are not going to be talking a lot of detail yet, because it would be premature.

But we believe that from our product perspective and our package perspective that during this fiscal year we think we can actually get some more share in that space and we are focused in doing that.

But that is a wait for what's the space type answer.

Okay.

And then I just had one last question.

You mentioned two quarters ago there were some Telco deals that slipped into last quarter you were expecting it to close.

Did that close?

Yes.

Specifically, it did.

That's it.

Okay.

Thank you.

Okay.

Thanks.

Our next question comes from [Saud Masood] UBS.

Thank you.

Good afternoon, guys.

I just wanted to get a little bit more color on your hiring strategy.

You seemed to hire 45 in the quarter.

I think it was expected around 60 to 80.

How should we view your hiring plan going forward?

Are you going to be focusing more on sales force productivity improvement and a potentially more challenging end market?

And do you expect 2008 to be a slower hiring year for you guys compared to last year?

Yes.

Well we said for the coming quarter we were planning on adding 30 to 50.

So you look at the first half and definitely we are hiring at a lower rate than we did last year.

But that being said, given the environment, John mentioned this, we're approaching this cautiously but still with optimism about our top line growth and specific investments we're going to make in the business.

So --

The other thing on head count is what's adding is a lot of our priority right now is focused on the ARX, Acopia, the data solution space because we can see faster leverage there.

That's what happened last quarter and it's going to be the same this coming quarter as well.

And then we'll take a view in the second half.

Okay.

If I were to ask you more of a macroquestion on sales force productivity, do you believe the improvements will impact different products differently or is it essentially just a rising type?

Even though you focused ARX, you believe the overall productivity level improved do you end up selling more along with ARX?

Right.

There is no question in my mind, this is an opinion I have held for a long time is that obviously the more competitive your product is the more you are going to see increase in sales productivity.

If you look at two particular products moving into this quarter and moving into the second half, clearly one is ARX line and the other is Acopia -- sorry, is VIPRION.

So two areas for comparativeness we believe is very, very strong with absolute best of breed.

So we'll focus a lot on that.

Then I also mentioned we believe at the bottom end we can do stuff there with product refresh over time, but definitely product competitiveness and technology leadership is absolutely linked to sales productivity.

Okay.

One last question.

And this is a side question on cash flow from operations.

I believe the guidance was greater than $45 million for the quarter and came out at 42.

Maybe just some color around what happened there and also just on inventory I think it came in a little bit leaner around 10 million versus 13 to 14 million.

Color on both of these would be great.

On the cash flow ops, specifically our contract manufacturer was acquired recently and with the new relationship in place, we just have different payment timing agreements.

And it's because of that we ended up below the range.

That is a one-time thing that should work outgoing forward.

And then, the other question?

The inventory.

The inventory being down.

If you look at what we carry on our books and inventory, it is a lot of raw materials, some specific components.

That was really just a timing element of orders coming in.

Okay.

Thank you very much.

Our next question comes from Scott [McCabe], Lehman Brothers.

Hello?

Mr.

McCabe, your line is open.

You may want to unmute your phone.

Hello?

Catherine, can you hear me?

Yes, I can.

Catherine, we are going to take one more question and then we are going to end the call, okay.

One more question, thank you.

Paul Mansky from Citi has the next question.

In under the wire, thanks a lot.

A lot of the questions have been asked and answered.

But I did want to touch base on whether or not you wish to kind of take a stab at providing us a number of Beta customers and maybe a mix between carrier and enterprise.

I think we were asked.

The number of Beta customers is reasonably small and that is because this is a very sophisticated product.

Frankly it is tough to get customers to really, really push it.

Given what to go through.

The number of evals, which isn't beta, which is potential revenues, is increasing.

As I say, we expect that to increase during the quarter as well.

So we think we are going to see modest, in terms of revenue, this coming quarter.

And then a ramp up for the second half.

In the mix?

In terms of, what was the question?

Enterprise versus carrier.

Initially.

Interesting question.

Probably more toward web monster and carrier.

But that can change with a big deal.

So I'm being a little bit reluctant.

Definitely, the first interest is definitely web monster and Telco.

Okay.

Great.

Thank you very much.

All right.

Thank you very much for joining us.

And please give us a call if you have any questions.

Thank you.

And we'll talk to you next quarter.