F5 Inc (FFIV) 2008 Q2 法說會逐字稿

Welcome to the F5 second quarter financial results.

All parties will be in a listen-only mode until the question-and-answer session.

Today's call is being recorded.

If you have any objections, please disconnect.

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

John Eldridge, Director of Investor Relations.

Thank you.

Sir, you may begin.

Thank you.

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

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, Mark Anderson, Senior VP of Worldwide Sales, Julian Eames, Senior VP of Business Operations and Global Services, Chris Lynch, Senior VP of Data Solutions, Dan Matte, Senior VP of Marketing and Karl Triebes, Senior VP of Product Development and CTO, are also with us to answer questions following our prepared comments.

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

addition, you can access an archived version of today's live webcast on the events calendar page of our website through July 23rd from 4:30 p.m.

today until 5:00 p.m.

pacific time April 24th.

You can also listen to a telephone replay at 800-925-5414 or 402-530-8073.

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

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

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

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

With that, I will turn the call over to Andy Reinland.

Thank you, John.

During Q2, continuing solid execution enabled F5 to achieve our 21st consecutive quarter of sequential growth.

Revenue for the second quarter of fiscal 2008 was $159.1 million, within our guided range of $158 million to $160 million.

GAAP EPS of $0.21 per diluted share was also within our guided range of $0.21 to $0.22.

Excluding stock-based compensation expense, non-GAAP EPS was $0.35 per diluted share.

Product revenue of $112.1 million represented 70% of total revenue.

Service revenue of $47 million was 30%.

Book-to-bill for the quarter was less than one.

On a geographic basis, the Americas represented 55% of revenue, EMEA had another strong quarter, accounting for 23%, and A-Pac was 13%.

In what is typically Japan's strongest quarter, revenue was down approximately $0.5 million dollars from Q1 and accounted for 10% of total revenue below expectations.

Revenue from our core application delivery networking business, including application security and LAN optimization was $143.6 million or 90% of total revenue.

Revenue from our ARX storage virtualization products contributed $8.1 million or 5% of total revenue.

Revenue from FirePass was $7.5 million, just under 5% of total revenue.

Looking at revenue by vertical, the finance sector comprised 25% of total revenue.

Telco represented 19% and the technology sector was 20%.

Although we had expected U.S.

federal to be up in Q2, it was slightly down from Q1, comprising 3% of total revenue.

During Q2, we had one greater than 10% distributor, Avnet technologies, which accounted for 12%.

Moving down the income statement, GAAP gross margin in Q1 was 76.9%.

Excluding approximately $1.1 million of stock-based compensation expense, non-GAAP gross margin was 77.6%.

GAAP operating expenses of $99 million were within our target range of $97 million to $100 million.

This includes $14.6 million of stock-based compensation.

Our GAAP operating margin was 14.8%.

Our non-GAAP operating margin, which excludes stock-based compensation, was 24.6%.

Our GAAP effective tax rate was 39%.

Excluding stock-based compensation expense, our non-GAAP effective tax rate was 35.3%.

On the balance sheet, we ended the quarter with $450 million in cash and investments.

Cash flow from operations was $36.9 million.

During the quarter, we repurchased approximately 4.4 million shares of our common stock for $100 million.

Accounts receivable DSO ended the period at 58 days, consistent with our guidance and with last quarter.

Inventories at quarter end were $8.6 million.

Deferred revenue increased 11% from the prior quarter to $122.6 million.

Capital expenditures for the quarter were $7.7 million, and depreciation and amortization expense was $5.8 million.

During Q2, we increased our headcount by approximately 40 people, ending the quarter with 1,665 full-time employees.

Moving on to the second quarter outlook, clearly the economic environment has made our goal of achieving sequential revenue growth throughout fiscal 2008 more challenging.

However, we continue to see strength in our pipeline and opportunities in both application delivery and storage virtualization.

Taking these factors into consideration, we are targeting Q3 revenue in the range of $160 million to $162 million.

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

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

We believe we have the team in place to execute on the current market opportunities and to meet our near term product development goals.

Accordingly, hiring will likely be modest and we do not expect to increase headcount significantly during the current quarter.

For Q3 we anticipate operating expenses in the range of $98 million to $101 million, including approximately $14 million of stock-based compensation expense.

We are forecasting our effective tax rate at 38%.

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 cents per diluted share.

Excluding stock compensation, our non-GAAP EPS target is $0.34 to $0.35 cents per diluted share.

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

We expect inventory levels within a range of $9 million to $10 million, and we expect cash flow from operations to be in excess of $40 million.

For a reconciliation of expected non-GAAP, third quarter earnings, please refer to today's press release.

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

Thanks, Andy, and good afternoon, everyone.

I was very pleased with the F5 team's performance in Q2.

We now have notched up 21 quarters of sequential growth, a performance we are proud of.

I was especially happy that we were able to deliver sequential quarterly growth in product revenue in both our application delivery controller business and in our storage virtualization business.

From a geographic perspective, we saw another strong result in EMEA, and excellent results in Asia Pacific.

ur North America enterprise business was down sequentially from last quarter as a result of a drop in our U.S.

telco vertical.

Excluding U.S.

telco, North American enterprise was up slightly quarter over quarter.

I was pleased with that result given the usual seasonality issues that we see in North America enterprise in Q2 combined with the current challenges in the economy.

We continue to be disappointed with our performance in Japan and with our U.S.

federal business, both of which were down sequentially from the previous quarter and below our internal expectations.

We continue to see delays in final sign-offs on projects where we are confident that F5 solutions have been selected, but spend has been delayed to future quarters.

Our professional services business was very solid and we expect that trend to be maintained throughout the year, as deferred revenues continue to increase and renewal rates remain high.

Another area of our business that was very encouraging was the number of million dollar plus sales wins that we achieved on a global basis and on major geographies.

This was definitely a global trend, with sales greater than $1 million in the U.K., France, the Netherlands, China and of course the U.S.

We continue to make good progress -- progress with sales of our ARX range of storage virtualization products now in our product portfolio from the Acopia acquisition.

In the December quarter, approximately 65% of ARX sales were in the financial services vertical, with a large proportion concentrated in the Wall Street investment banking sector.

In Q2 we were able to expand the ARX business and penetrate other verticals to the extent that the finance vertical represented 29% of the ARX business.

Our goal is to the to expand our penetration into other verticals during Q3 and the rest of the year.

We made a significant investment in Q2 to train the existing F5 channel on our storage virtualization product, and we are seeing that investment starting to pay off in Q3 and expect this payoff to accelerate in Q4.

From a product perspective, we have a number of exciting development initiatives that should increase our competitive technological leadership in both the application delivery controller and storage virtualization markets.

We started to ship our chassis-based flagship VIPRION product in Q2 and we have already received some really cool initial orders for the product.

The interest level for the VIPRION products is definitely increasing.

The pipeline of prospects is growing and we should see some solid results in Q3.

We believe there is no competitive alternative to VIPRION's performance capabilities high availability features.

The technology refresh of our existing BIG-IP product range continues to be on track, and we have moved into customer beta test phase with our new entry level systems.

These new products will enable us to offer customers significant performance and functionality improvements at a very competitive price.

As far as future guidance is concerned, Andy indicated that we see Q3 revenue guidance in the range of $160 million to $162 million.

We have a comparative leadership position with ARX, BIG-IP and VIPRION.

Our business pipeline is solid.

Internet traffic and unstructured storage continue to grow significantly and F5 products provide our customers a very compelling and substantial return on their investment.

However, clearly the economic situation makes it a conservative spending environment right now, and we believe we are taking a cautious but realistic view of our opportunity.

That being said, I continue to remain very optimistic about the opportunity for F5 in the second half of fiscal 2008 and beyond.

And I would like to close by once again thanking the F5 team and their partners for their efforts in Q2.

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

Thank you.

[OPERATOR INSTRUCTIONS] One moment, please.

This would be a first.

One moment for the first question.

Our first question comes from Troy Jensen.

Hello, can you guys hear me?

Yes, we can hear you, Troy.

Congrats on the nice quarter, gentlemen.

Thank you.

Couple questions quick.

Andy, I think last time we spoke, and you guys have stated publicly that you felt like a lot of the slowdown or kind of decelerating growth had to do with you guys kind of losing share or the low-end business not performing as well because you're pushing the software modules.

Just curious, the growth that you saw this quarter, was it evenly distributed among the low and high end, or do you think the low end bounces once the new products come out?

No, we saw the trend actually much the same and in fact slightly increasing in last quarter as well.

In other words, our 6400 product line, obviously I'm talking about BIG-IP and VIPRION, of course.

The 6400 product line growth was actually substantial, and we saw another slight drop-off in the entry level.

There's obviously some bad news in entry level dropping off, but when we think the product refresh, that actually becomes an opportunity.

So apart from Japan, every geography saw very significant growth in the high end.

Okay.

And on the new products, John, did you give a date or a time frame when you would launch?

I didn't give a date, but what I did say was it's in customer base test phase, so clearly it's a technology we're very well accustomed with and know.

So we feel good about that, but we won't give a date until it's finished customer tests.

Okay.

That's fine.

Question on Acopia now.

Speculation, I'd just love to run it past you guys, speculation is that a lot of the Acopia business is being used as load balancing, like some of the firms are doing big data center consolidations and that's it's not being used as the file of virtualization once the consolidation is complete.

Just was wondering if you guys have any metrics for how the product is being used or if you can just address that topic, that would be great.

Chris Lynch is dialing in from Boston.

Chris, do you want to do this?

Sure.

So obviously, migration is one of our key applications to the product and data center consolidation definitely creates an acute requirement for the product.

But the fact of the matter is that migrations happen daily with ad moves and changes and provisioning of the back end, so we don't see the phenomenon that you're suggesting.

Quite to the contrary, I point to the take rate in services.

And from my perspective, I'm not aware of any situation where a customer has taken us out of line, which is really what they would need to do, or they would do rather, if they were just using us for a one-time event.

And we're just not seeing that at all.

In fact, I would say that since the acquisition, we've seen the emergence of probably now our largest application of the product, which is tiering, allowing customers to move date from tier one to tier two automatically and seamlessly as their number one application.

And we need to be in line seven by 24 to do that.

And as most of you now, 30% of data in tier one is active, 70% that sits there is dormant, and we're all about moving to the 70% to cheap, low-cost manageable storage.

Perfect.

Keep up the good work, guys.

Our next question comes from Jason Ader of Thomas Weisel.

Thanks.

So if we looked at the performance, again, just expectations by region, John, how would you say it compared to the expectations going into the quarter?

I see North America on track.

Obviously we mentioned U.S.

telco, which was down a little bit.

But generally, North America enterprise, in particular, felt good about that.

Felt very good about EMEA, especially after having a previously really, really strong quarter.

Asia Pacific was absolutely fantastic as well.

And then I know that Japan is even probably listening to this, but we did see some issues there.

So that was a disappointment.

So all things being equal, North America, besides the telco, you have to be pretty satisfied with how did you there given what you're hearing from some of your competitors.

Absolutely.

The other thing was that highlighted the number of $1 million deals that we won on a global basis and we were very, very happy with that as well.

One of the things we had picked up was that there was sort of abnormal levels of discounting in North America.

Could you make any comment on that?

We heard that from some of your channels.

Is there any change in behavior there?

Certainly didn't show up in the gross margin.

Just curious as to whether there was any sort of difference.

No, definitely not.

None at all.

No different trend whatsoever.

And then, could you provide any color on Magnifier and (inaudible) without giving specific numbers could you at least give us some sense of how they did in the quarter?

Yes.

So Magnifier, which is now the application security module, we really measure that internally in two ways.

One is actually the number of modules and the licenses and the software and also the BIG-IP leverage that goes on there.

And it was pretty significant, very, very strong quarter-over-quarter year-over-year growth.

And that's -- along with was WebAccelerator.

If you look at the actual growth trends (inaudible) it's an excellent graph.

One optimization is still struggling for is -- I'm talking now about the WANJet product, we've got a whole number of things (inaudible) on the go, but frankly we're not going to discuss them until we're ready.

We've had one or two false starts there, so that's in process.

We haven't given up.

But that was actually pretty small.

WebAccelerator was strong.

ESM was strong.

So if I were to combine that security module together with the WebAccelerator there was growth, strong growth sequentially.

Yes.

But remember they're sitting on top of BIG-IP as modules.

You know that?

Okay.

Last question.

As we -- as we're going into this tougher economy here in certainly North America and a lot of the customers going through data center consolidation projects, obviously one of the big areas that we hear about a server virtualization with things like VM ware.

Could you comment on what impact that you may have seen or you might see from server virtualization just from the standpoint of fewer physical servers out there to load balance?

I'm wondering if you have any comment on that.

Sure, Jason.

This is Dan.

Couple of phenomenons going on in that space.

First of all, when people do consolidate their applications down to fewer physical servers, it becomes more important for them to protect them with products like (inaudible).

There's more eggs in one basket.

They want to make sure that one basket.

They want to make sure that basket is as protected as possible.

The other thing that we're seeing is that as people roll some applications into a virtualized environment, they're beginning to run into some performance challenges as well.

So again, things like WebAccelerator can really help out there.

So all in all, we still believe we're in the beginning phases of people really trying to roll out server virtualization in any big way.

And we think that's a net positive for us.

Also I should add, during the quarter too, you may have seen the announcement that we made with VM Ware, where we joined their technology alliance partner program.

And also, we published some deployment guides and actually opened up a forum on DevCentral as well for VM ware.

And one of the interesting things that we saw was with the white paper on how to deploy our products with VM Ware rose into our top ten list more quickly than any other document that we ever published.

Our next question comes from Erik Suppiger of Signal Hill.

Good afternoon.

Congrats on a good quarter in a tough economy.

On Acopia, it was up about 5%, how does that compare to what you were expecting?

And it sounds as though given that was -- it wasn't real significant growth and the financial piece of it came down significantly.

Can you give us any color as to what was going on with your sales strategy there?

It was pretty much what we were expecting.

It wasn't significant.

It was in the range of what we were expecting.

But you're right, that's why I highlighted the financial vertical, especially the Wall Street investment banking side of it, where we definitely did see a number of delays happening on projects.

And some of them could happen this quarter, some may be elongated beyond that.

So -- but we've taken that into account, but we're very happy with was the diversity of verticals and the usage models that Chris was talking about.

We still believe that we will exceed that [$30] million plus for the fiscal year and feel really good about it.

So now that we have the FI sales team quartered and trained, as I said in my script, we expect that to accelerate in the second half.

Where there any particular verticals that saw a sharp uptick with Acopia?

A range of them.

Manufacturing, technology, areas like that.

Then on the low-end product, doesn't sound like you're going give a date.

Can you at least comment as to whether or not some of the new models would be in the current quarter or in the second quarter?

I think you said in the second half of this year.

We're going to stick to that, Erik.

So it's -- we believe these new entry level products will have an impact on our business in the second half of this year and just leave it at that, while it's in customer beta phase.

Okay.

Then last question.

On the sales force productivity, it looks like you had a marginal improvement over last quarter from sales and marketing as a percentage of revenue, but where do you feel like you are in terms of making some material improvements on sales force productivity and what might we expect going forward?

We did see a marginal improvement on the productivity in the core, specifically.

We're hiring -- we were actually hiring reasonably aggressively last quarter in the data solutions space with Acopia.

So over time, we'll see an improvement in that.

Clearly you balance that with a tough environment.

So it's not really apples for apples anywhere.

We think we'll still see the productivity increasing as the aging of our sales force increases, which we're seeing.

Any sense for where you would like to get sales and marketing as a percentage of revenue?

No, we haven't set a target, an external target on that.

Very good.

Thanks a lot.

Thanks.

Our next question comes from Ittai Kidron of Oppenheimer.

Congratulations on a good quarter.

John, could you just clarify when you talk about second half of the year, are you talking fiscal or

Definitely fiscal, sorry.

Okay.

Just to make sure everybody's on the same page.

Now with regard to your hiring plans, just give us the macroenvironment, I guess the negative would be that the environment -- on the flip side you got a product refresh on the entry level, and you have VIPRION that's gaining a little bit of momentum.

At what point do you feel -- or what will you need to see from a gradual improvement to make you feel more comfortable in starting to hiring again more aggressively?

I think it's going to be pretty simple.

This is Andy.

We talk a lot about investing behind revenue, and we're committed to that approach to investments over the remainder of the fiscal year.

So we will be making those decisions, watching headcount as we do on a daily and weekly basis and making decisions as we see revenue develop.

John, specifically with regards to Japan, why do you think you're having issues?

What's not working relative to plan there?

How to you analyze it?

I think it's a couple of things.

First of all, there's definitely economy issues.

You can't escape them at all.

And we're not hiding behind them, but they do exist.

And then the point I mentioned earlier about -- if you look at the proportion of entry level systems in the geographies, Japan is much more concentrated towards selling lower end products.

In fact, Mark Anderson who is here, has actually been over in Japan and visited.

And we've got a plan and the plan is basically based on selling higher end products.

I think the new low-end products will help, almost by definition, but the real key for us in the longer term is to sell more up value where we've got more modules and more solutions and more features.

If I could just add, basically follow the plan that we've implemented in A-Pac, EMEA, North America, all three of those theaters are chugging along very well from a productivity standpoint and having success articulating the higher end platforms and a compelling value proposition.

Couple small ones for me, housekeeping.

On your distributors, it seems like as a percent of your revenues they've been going down more and more and more.

And I just want to get a better understanding, is that a reflection of a change in the relationship you have with them, or sort of expansion, a natural expansion of your other channels?

Because it seems like Ingram Micro is not -- you haven't mentioned that and Abbott is going down sequentially as well.

I just want to understand what's going on there.

From our perspective, there's really no change in relationships with the distributors.

And if -- not to talk about any one individually, but if you take our top distributors as a group, the total percentage really didn't change that much.

It was really a mix issue between the distributors and I think it was primarily tied to their given businesses within this quarter and how they were affect by the economy.

Very good.

Lastly, Andy, can you remind us how much you have left on your buyback?

The total plan was for the calendar year and it was $200 million.

So we still have $100 million left in the plan.

Okay.

Good luck, guys.

Thanks very much.

Our next question comes from Mr.

Matt Robison of Ferris, Baker Watts.

Good afternoon.

Have you -- has Sharepoint begun to move the needle for you guys in terms of significant application driver and were there any other applications that might have developed for you guys significantly in the quarter?

This is Dan.

Sharepoint absolutely is making impact for us.

We see the efforts that we're doing with Hewlett Packard and we're seeing it draw business and large opportunities really globally, so we've been very, very please with that.

We're not going to break out any numbers on that specifically.

But other things, like Office Communication Server 2007, we just had some new stuff come out for Windows Server 2008.

We have an application ready network solution for that.

Dynamics as well from Microsoft, new stuff on the Oracle front as well.

Oracle communication mobility servers.

So multiple, multiple things going on there.

So we continue to be very pleased.

Is this moving your business towards system integrators from the kind of channel partners, distributor-type partners?

I don't think in any meaningful way it's moving away from them, but we are seeing systems integrators that we partner with meeting that more of an impact for us.

Folks like Hewlett-Packard, like EDS are all doing very well.

We're also seeing our partners uplift their capabilities by going in and selling with application deployment.

So the application ready networking phenomena that we've trained our worldwide sales team on we've actually extended a great effort to train our partners.

So their value statements are increasing just as ours are.

Are you seeing some of the smaller distributors doing relatively more of the fulfillment, is that -- for these integrators, is that part of the backdrop for the decline in percentages from the traditional large ones?

I think it's just more evenly spread over a larger number of distributors.

As Andy said, the percentage of business that went through distributors hasn't changed materially.

It's just that we've done a more surgical job in each theater to choose distributors that are going to suit our needs and suit our customers' needs.

Okay.

Any -- I know you talked a little about Japan.

What this -- how are you going to improve federal, or what's the backdrop for what's going on there?

Federal, and we're pretty clear on this, is that as I said in my introduction, most of the federal projects we're talking about, we are very confident we've won the deal.

Frankly, what were our federal team with these types of projects are doing are tracking them through the system.

It's really a matter of that happening.

So I think you're going to see it, but it's definitely going to be linked to projects being in contract and coming our of contract.

And it's how the situation is at the moment.

If I remember right, the last call you had one that slipped.

Did that just continue to slip or did you pick that one up and then just lose some others?

We've more than one that slipped last quarter.

Some we picked up and some we didn't.

Okay.

Was there anything particularly noteworthy in terms of the CapEx spend?

Any particular area of emphasis?

Only in that we do have some new facilities coming on board, so a lot of the increase over our run rate has been related to IT, but beyond that, no.

And can't get off the phone without asking the number of DevCentral users.

We'd be disappointed if you didn't ask, Matt.

We're at 25,761.

Seems like maybe the biggest sequential move you've had.

Let's see, where were you last time, was 21,833.

So that's quite a step up.

That seems like maybe the biggest sequential move you've had.

It's really up sequentially.

Just seen lots of tremendous stuff.

We're adding lots of capabilities to DevCentral, more podcasts and video casts and changed as well, actually leveraged some I-rules to make the content on DevCentral more accessible to search engines like Google.

Matt, we're going to let you go here, but one clarification, as I said, IT spend, I meant TI related to facilities.

So tenant improvements, just to clarify that.

Okay.

Good.

Thank you.

Our next question comes from Saud Masud of UBS.

Great.

Thank you for taking my question here.

Great quarter.

Just some clarification around the average deal size in the quarter.

You kind of hinted on $1 million deals, you're trying to see more of those, but in a soft market how do you sort of reconcile that with there's a sense that larger deals are getting harder to get approved, there's an added layer of approvals, if you will.

Can you maybe provide some color around how you are able to succeed in actually scaling up some of these deals and are they converting on them?

I do.

I think as the value proposition the products bring to the customer, the return on investment they bring, the growth of Internet, the fact that internet is so mission-critical to verticals including finance.

We're well aware that a percentage of finance vertical is of some concern to investors given the problems there.

But the reality is -- and we've said this now for three-quarters.

We think we're pretty robust in that area and resilient.

You're never resilient completely, but because these applications are mission critical, they get competitive advantage, and they're growing at the same time.

So I think it's where you sit and the rate of spending.

Right, right.

And just another sort of side question on VIPRION, actually.

I think last time, on the last earnings call, you mentioned that most of your VIPRION evals are with the carriers.

Now, maybe just extrapolating this, but you saw some weakness in the telco vertical.

How do you see that vertical spending potentially impact VIPRION adoption as we go through the first half here?

I actually said, I used the word cool when we talked some of the VIPRION orders.

It's interesting, we've expected VIPRION to be good in telco, good in dot com and good in possibly the large enterprises, and that's the way we think it's going track.

The big dot com has been bigger in terms of opportunity.

And we expect telco actually to be reasonable with VIPRION this current quarter.

We're pretty confident with that.

I think VIPRION this quarter is probably going to exceed our expectations.

Great.

That's all the questions I had.

Thank you.

Our next question comes from Samuel Wilson of JMP Securities.

Just two quick accounting questions.

First, can you give us the 123R charges by segment on the OpEx side?

How much was R&D and how much was SG&A?

You know, it's on the P&L, I think for you, Sam, broken out there.

It is?

If you look at the press release.

Admittedly, I did not look that close.

I will look again.

And the second thing is -- there it is, I got it.

And the second thing is, allowance for doubtful accounts was up 50% quarter on quarter.

Is there anything going on there?

Could you ask that again, Sam?

Allowance for doubtful accounts is $4.1 million was up -- I'm sorry, $4.5 million, was up 50% quarter on quarter.

Is there anything going on there?

No, that doesn't sound right to us.

Actually, our accounts receivable are very clean, and we've had no collection issues and no reason to take that up, so that's not ringing a bell with us.

Accounts receivable net of allowances, $4.491 million versus $3.1 million last quarter basically, $3.2 million two quarters ago.

One was two quarters ago.

Two quarters ago.

Last quarter I pulled up from your Q, it was $3.1 million.

Right.

In September it was 3.1.

There's been some natural increase just due to the size of the AR balance but the aging is clean, it's completely current.

So there's a couple other reserves that go in there.

There's a reserve for basically rebates and stuff like that, so it will fluctuate a little bit but there's nothing major going on there.

Thanks, John.

In our DSO, the consistency we're seeing there we see as very positive.

Got it.

Okay.

Thank you.

Thanks Sam.

Our next question comes from Mark Sue of RBC Capital Markets.

Can you talk about the overall closure rates and can you quantify perhaps the total deals that slipped from March to June and whether all of these split deals have been recovered?

On the closure rate, as we looked at the pipeline, we talked last quarter about having seen the percentage of closure rates on our factored pipeline coming down, and we saw that trend continue in the quarter.

So it's still, not huge percentages, but meaningful, and we definitely factored those in.

As far as deal slippage, John mentioned that we saw deals elongate and we're watching closure there, but we really don't quantify or talk about specific deals.

So I think we'll leave his comments as is.

So the guidance for next quarter, are you assuming the closure rate you saw in the March quarter, or are you assuming a normal seasonal closure rate for June?

I think we're definitely factoring in what we're seeing in the most recent closure rates.

Got it.

Lastly, decline in telco, is that all related to evaluations of the VIPRION, so the telco is a lot of pent up demand.

Is that how we should read it?

It's not all related.

I do believe we've got some good opportunities coming in this current quarter with VIPRION and telco, but it's like a lot of the enterprise world at the moment, spending is tight, so some of it is attributed to that.

But yes, we think VIPRION is definitely a candidate for some up side there.

Okay.

Thank you, gentlemen, and good luck.

Thank you.

Our next question comes from Tim Long of Banc of America Securities.

Good afternoon.

This is Jeff dialing in for Tim.

Can you just provide a little bit more color regarding the business environment, particularly within North America and Europe and what you're factoring into the guidance?

It sounds like the North American commercial business held up okay during the quarter.

How do you expect that to materialize going forward?

And then have you picked up any sense that the strength -- or I guess some of the weakness in the U.S.

is starting to trickle overseas, particularly in Europe, and are clients taking note of that and maybe becoming more cautious?

Yes, we haven't seen -- I mean, basically we're expecting a similar type environment in this current quarter as we saw in the March quarter.

Maybe even slightly conservative on that, in fact.

But it gets back to execution, it really does.

It comes down to making sure you're run that revenue daily, you run the forecasting weekly, you've looked at where you sit in the sales cycle.

It really is that -- that's the environment we're in, and we think we're pretty good at handling that.

So that's where we get our guidance from.

In terms of geography wise, EMEA had three fantastic quarters.

We're hearing optimistic stuff from the EMEA team for this current quarter.

And I think it's going to continue that way.

The big difference in EMEA for us is that -- and I'm sure Mark would repeat this, we've really started to penetrate major accounts to now.

If you go back nine months ago, a year ago the U.S.

stood out pretty significantly when you looked at the order size, million dollar, half million dollar orders.

We're starting to see similar order sizes coming in EMEA.

And that's where we're seeing a lot of the growth.

If we can keep that execution going, and I think we can, we should have another solid quarter then.

All right.

Then moving into slightly different direction, product revenues continue to decelerate on a year-over-year basis, as we look into the June quarter, are you anticipating sequential growth in product revenues or should we expect most of the strength to come from services?

We haven't gone into that detail.

We wouldn't.

But the one thing I'd point your attention to, and I said at the beginning of my introduction, was that we saw sequential product growth in Acopia, the ARX products and in the ADC application -- or core business last quarter.

And I think that's pretty significant, given the environment was such economic tougher environment.

So we went from December end to March end, where we increased sequentially.

So year-over-year, you're right.

But if we maintain that trend, then obviously the year-over-year comparison get easier.

But I think that was a really key milestone for us in a tough economy, a tough quarter, over a lot of peers and clearly saw some tough times as well that we managed to grow our core business sequentially.

And have you talked to your customers about some of these new low-end hardware platforms that are coming and any feeling that that could maybe slow up business here in the near term as they wait for that new hardware?

I'm going to say no and we watch it like a hawk and we're suitably paranoid about the Osborne effect, as it's well-known that you're describing.

We don't think that's going to be an issue at all.

We have got products in customer beta test so clearly by definition our customers are aware of the product.

But we've never seen that in the past.

It's a good news/bad news thing.

In other words, when we introduce new products, the customers are very conservative about taking them up because it's mission critical.

That's the bad news.

The good news is it allows us to actually integrate new products very smoothly and we think it's going to be exactly the same with the entry level.

Thanks, guys.

Thank you.

Our next question comes from Kimberly Watkins of JP Morgan.

Thank you.

Thanks for taking my question.

Had a question on Acopia.

You might have said this.

I have heard you say in the past, I think last call, that you thought you would be disappointed if you didn't see revenue of $30 million this year for that business.

Could you provide us an update on that?

And then also wanted to dig into gross margins.

I know in the past you've laid out an expectation or a goal to get to 80% at some point in the future.

Where do you see yourselves on that, on the path to an 80% level?

So for Acopia, and John mentioned this earlier, we would be disappointed not to exceed the $30 million target is what we've been saying.

So we still feel that way.

We see great opportunity there.

As far as the gross margin goes on the 80%, I think specifically we're talking as a targets for us related to our product sales, and Acopia in particular we're paying attention to because they came in lower than our other product line.

But we saw great improvement over the last quarter for the second quarter in a row, driven by lower discounting and then some design and supply chain efforts that have started to pay off for us.

So we feel very good about how we're managing our gross margin overall.

Okay.

So where are you now in that cycle?

I think when you acquired them you were talking about a low 60s number.

Yes.

I think last quarter we said that we had gotten that up to the high 60s, and I don't know exactly where we are, Kim, but I know it was improved from there.

Okay.

And then just an update on the total addressable market.

I remember at your analyst day in New York Chris talking about $300 million market, going to $1 billion in a couple years.

Is that still kind of the opportunity that you're seeing for that product?

Any reason to change one way or another, increase or decrease?

The numbers are mainly from analysts, but the way we view it is very sir.

And I assume you're talking about Acopia specifically.

Yes.

Yes, we see the market there as a fortune 500.

We have limited penetration rate right now and good penetration in finance vertical but pretty limited overall, and that's a massive opportunity for us.

And then as you look from a geography point of view, we're really just starting.

We've just hired somebody in France, for example, you bid Japan and opportunities there, Asia.

We don't see any distraction whatsoever in the addressable market.

Okay.

Great.

And then one last kind of housekeeping question.

Can you give us the total government percentage this quarter?

Yes, total government was 7%.

Okay, so roughly flat to last quarter.

Yes.

Thank you.

Thank you.

Our next question comes from Ken Muth of Robert Baird.

Thank you.

Andy, do you still expect operating margins to improve through the rest of this fiscal year?

You know, I think given our revenue guidance and our expense run rate, I think that's probably going to delay out a quarter or two, just as we execute.

I think we still want to invest behind revenue definitely, but given the position we're in, especially in the current quarter with our run rate of additional employees and marketing, it's going to be tough.

We are going to try to manage it flat, but our longer term goal is definitely to improve that as we see revenue improve.

Okay.

Then just trying to put together a couple of pieces that you talked about earlier.

John, on the call, you talked about how the book to bill is slightly below one, I think and the guidance is up sequentially.

Is there something that has maybe changed in April or what gives you the confidence that things can improve sequentially like that?

First of all, obviously we're towards the end of April and we've given our guidance, so we've taken a lot of that trend into account.

But there's nothing different.

It's we look at our pipeline, we work with the sales management team extremely closely, we look at our pipeline, we think we're taking a pretty conservative approach there.

Clearly we've got pretty good visibility into the service part of our business.

And then we look at areas like VIPRION, we look at areas like ARX.

And that's what gives us some pretty good confidence moving into this quarter.

And then just a quick follow-up.

Does the guidance you gave, how does that favor in -- factor in, sorry, the U.S.

enterprise market?

That it would be flattish, up sequentially, or how does that get factored in?

We didn't go through the geographies, and we have done that in the past.

But just to give a very high level summary, we would expect North America enterprise, generally North America business to be up this quarter.

EMEA to be flat to slightly up, Asia Pacific to be flat to slightly up.

And Japan to actually be down, although that's what we would expect in the first quarter of the calendar year -- of the financial year.

Thank you for your help.

Thank you.

We're going to take one more caller then we'll end the call.

Our last question comes from Rohit Chopra of Wedbush Morgan.

Thanks for taking the call.

Just want to ask you a little bit about the competitive landscape.

I heard that Cisco was being a little more aggressive, especially on the support side.

I just want to get a sense of what you saw out there.

Also, with the Acopia product, we also heard from some channel people that Brocade and EMC were also getting a little bit more aggressive in the file virtualization area.

Want to get a sense of your take on that.

Sure, Rohit.

This is Dan.

Then I will hand off to Chris for the Acopia piece.

Basically, in terms of Sisco, we really haven't seen them.

We've analyzed a lot of data.

Haven't seen any changes last quarter, calendar Q4, the last market share numbers that got published, we actually gained market share on them.

And then what our sales force is reporting back to us, with the introduction of the 4710 they had some months ago now, still not impacting things in the marketplace.

Chris.

So with respect to EMC, I think it would be hard for them to get any more aggressive than they already have been through my Acopia tenure and definitely through my first couple of quarters at F5.

But unfortunately for them, they don't have a product suits the high-end enterprise.

So while we see them and Brocade with the new view product in the low end and probably in the channel you're referring to, we don't see them in the high end enterprise.

We don't see brocade at all in the high-end enterprise.

When we do see EMC we're highly successful and effective in competing against them given the enterprise class product that we have versus theirs.

We actually did a business review, Chris's team last week and we went through all the sales wins, and their win rate is incredibly high.

I mean, it's approaching 100%, just to put things in perspective.

Then I know you sort of -- you talked a little bit around this, but talk a little bit about linearity through the quarter, and if you can add some qualitative comments on how things progressed throughout the quarter.

Did it start to get worse as you got towards March and at the beginning of April?

How did it progress?

Just give us an idea if you don't mind.

We saw something like, I would describe it as average January.

We saw a very strong February.

We saw a weak March in the middle, then it got strong at the end.

Okay.

And linearity was pretty typical for normal quarters.

The third month was just under 50%.

Let me just ask you one other thing.

Another thing one of our channel contacts indicated, the number of deals has decreased out there but the size of the deals has gone up.

So you mentioned that the size of the deals has gone up, but is it true that there are fewer deals on the table, and it's becoming a little bit more difficult out there?

Not just the economy.

I'm looking over at Mark Anderson.

He's nodding no.

We have not.

No, not at all.

No, the issue with deals in the pipeline is getting them closed.

It's not the size of the pipeline or the number of deals.

Thank you.

Okay.

Thanks very much for joining us, and we'll look forward to talking to you all next quarter.

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