F5 Inc (FFIV) 2008 Q3 法說會逐字稿

Welcome to the F5 Networks results conference call.

At this time all parties will be able to listen only until the question and answer portion.

Also, today's conference is being recorded.

If anyone has any objections please disconnect at this time.

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

John Eldridge, Director Investor Relations.

Sir, you may begin.

Thank you.

Welcome to F5's conference call for the third quarter of fiscal 2008.

Speakers on today's call are John McAdam, President and CEO; and Andy Reinland, Senior Vice President Chief Finance 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 or Product Development and CTO are also with us to answer questions following our prepared comments.

During Q&A today we'd ask that you limit yourself to two questions.

That will ensure that everyone who would like to ask a question has an opportunity to do.

If you have follow-up questions that are not addressed on the call please direct them to me afterwards at 206-272-6571.

If you don't have a copy of today's press release it is available on our website, www.f5.com.

In addition you can access an archived version of today's live webcast on the events calendar page of our website through October 22.

From 4:30 p.m.

today until 5:00 p.m.

Pacific time July 24, you can also listen to a telephone replay at 800-216-3086 or 402-220-3765.

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.

Now I will turn the call over to Andy Reinland.

Thank you, John.

During Q3, solid top-line results marked our 22nd consecutive quarter of sequential growth driven by strong execution in our core business.

Revenue for the third quarter of fiscal 2008 was $165.6 million, above our guided range of 160 million to $162 million.

GAAP EPS of $0.23 per diluted share was also above our guided range of $0.21 to $0.22.

Excluding stock-based compensation expense, non-GAAP EPS of $0.37 per diluted share was also above guidance.

Product revenue of $114.8 million represented 69% of total revenue.

Service revenue of $50.8 million accounted for 31%.

Book to bill for the quarter was greater than 1.

On a geographic basis, the Americas represented 58% of revenue.

EMEA accounted for 21%, and APAC was 13%.

Japan contributed 7% of total revenue, reflecting continued weakness which was compounded by expected seasonal softness.

Revenue from our core application delivery networking business was $153 million and accounted for 92% of total revenue.

Revenue from our ARX storage virtualization products was $5.1 million down from $8.1 million in Q2 and accounted for 3% of total revenue.

At $7.5 million, revenue from FirePass was flat with Q2 and represented just under 5% of total.

During Q3, technology was our strongest vertical at 22% of total revenue, teleco and service providers represented 21% and the finance sector was 20%.

US federal was 4%, and total government accounted for 9%.

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

Avnet Technologies at 14.2%, and Ingram Micro at 10.8%.

Moving down the income statement, GAAP gross margin in Q3 was 76.9%.

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

GAAP operating expenses of $100.2 million were within our target range of 98 million to $101 million.

This includes $13.8 million of stock [comps] expense.

GAAP operating margin was 16.4%.

Non-GAAP operating margin, which excludes stock-based compensation expense, was 25.4%.

Our GAAP effective tax rate was 38.1%.

Excluding stock-based compensation expense, our non-GAAP effective tax rate was 34%.

On the balance sheet, we ended the quarter with $447 million in cash and investments.

Cash flow from operations was $55.8 million.

Also during the quarter, we repurchased $50 million of our common stock representing approximately 1.8 million shares.

Accounts receivable DSO ended the period at 53 days.

Inventories at quarter end were $9.7 million.

Deferred revenue increased 13% from the prior quarter to $139 million.

Capital expenditures for the quarter were $11.3 million, and depreciation and amortization expense was $6 million.

We ended the quarter with approximately 1665 employees, essentially flat with Q2 as guided on the last call.

Moving on to the fourth quarter outlook, we are targeting Q4 revenue in the range of 172 million to $174 million.

We expect GAAP gross margin in the 76 to 77% range, including approximately $1 million of stock-based compensation expense.

We anticipate operating expenses in the range of 108.3 million to $111.3 million.

This includes approximately $15 million of stock-based compensation expense and a one-time $5.3 million charge related to office consolidation at our Corporate headquarters.

We have entered into subleases ranging from three to five years for excess office space.

We believe we have sufficient space to accommodate our growth at headquarters during this time frame.

When we report our non-GAAP results for Q4 of '08 we will exclude this charge due to the nonrecurring nature of the expense.

Our GAAP EPS target is $0.19 to $0.20 per diluted share.

Excluding both stock compensation and the nonrecurring facility charge, our non-GAAP EPS target is $0.38 to $0.39 per diluted share.

We are forecasting an effective tax rate of 38%.

Excluding stock-based compensation, and the nonrecurring facility charge, we expect a non-GAAP effective tax rate of 34%.

On the strength of the quarter just ended, and our outlook on the business, we plan to increase our headcount by 40 to 60 employees in the current quarter.

We estimate DSOs will be in the mid 50-day range.

We expect inventory levels within a range of 10 million to $12 million, and we believe our cash flow from operations will be in excess of $50 million.

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

Thanks, Andy, and good afternoon, everyone.

I was delighted with the F5 team's performance in Q3.

From a geographic perspective we saw strong results in Americas, Asia Pacific, and EMEA, where we continue to win $1 million plus wins on a global basis.

As expected business in Japan was down sequentially during the first quarter of Japan's new financial year, and our US federal business was up sequentially in Q3 but still remained below our internal targets.

Once again, our professional services business was very solid.

We achieved our largest ever increase in or deferred revenue balance which now sits at $139 million.

Our core application delivery controller business was also very strong driven by significant sales of our new chassis based product VIPRION.

As I mentioned in last quarter's call, we believe there's no competitive alternative to VIPRION in the market today.

And we expect VIPRION to be a key driver of our business in Q4 and throughout fiscal 2009.

Business from our ARX range of storage virtualization products was down sequentially from last quarter and below our internal target.

The main reason for this was a precipitous drop in business in the financial vertical where budgets for new projects are extremely tight.

Regardless of the ROI benefits that would be obtained.

ARX business from the financial vertical was under $500,000 in Q3, down from over $5 million in Q1.

This contrasts with business from our core application delivery controller products which continues to be very strong in the financial vertical and we expect strong demand to continue in Q4 and into 2009.

On the positive side, sales of ARX outside the financial vertical continue to be strong in Q3 and we are very focused on continuing expansion of our ARX business by penetrating other verticals in Q4 and in fiscal 2009.

From a product and technology perspective, I feel very good about our competitive position in the marketplace.

As I mentioned earlier, VIPRION has no real competition.

The pipeline of VIPRIONs deals has grown steadily during last quarter and the interest level for high performance -- for its high performance capabilities and unique feature set continues to grow.

We also have a comprehensive product line refresh on our road map which we believe will maintain our technology leadership throughout next year and be a significant driver for continued growth in our business.

Today we issued a press release announcing a new entry level product.

The BIG-IP 1600 and the BIG-IP 3600.

These two products will replace our existing BIG-IP 1500 and 3400 product and significantly increase our competitiveness at the lower end of our credit line.

The new 1600 and 3600 products offer twice the performance of the existing product for approximately the same price.

More importantly, we increased the functionality of these products significantly by adding new features including application firewall and web acceleration capabilities.

We believe we have created a significant barrier to entry with our TMOS architecture and a clustered multi processing architecture which we developed for VIPRION.

This new architecture has been deployed in these new entry level products which allows us to deliver the increased performance and additional functionality.

We have already taken orders and shipped these new products on a limited availability basis and we expect to see strong interest in the new product in this current quarter and into fiscal 2009.

As I stated earlier, we have a comprehensive plan to refresh our entire BIG-IP product portfolio.

The entry level products marked the first phase and we expect to be introducing more products in the first half of fiscal 2009.

As far as future guidance is concerned, Andy indicated that we see Q4 revenue guidance in the range of 172 million to $174 million.

As we commented on last quarter the key business drivers for our products remain in place.

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

However, the economic situation makes for a conservative spending environment, and we believe we have taken a suitably cautious but realistic view of our opportunity.

Q4 is usually a very strong quarter for the Company and our pipeline moving into Q4 is very solid.

We also enjoy a competitive leadership position with ARX, BIG-IP, and VIPRION, and we expect to increase this competitive leadership with new products like the new BIG-IP 1600 and 3600.

I continue to remain very optimistic about the opportunity for F5.

I would like to close by once again thanking the F5 team and our partners for their efforts in Q3.

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

Thank you.

(OPERATOR INSTRUCTIONS) Erik Suppiger with Signal, your line is open.

Good afternoon.

Congratulations.

Thanks, Erik.

Thank you.

Quick one here.

The ARX was weak in the financial sector but it sounds like your BIG-IP did very well in the financial sector.

What -- why the difference between those two?

We're pretty sure we understand the difference.

In fact, if you look at a number of the surveys that have been done, Erik, on the financial sector in general spending with CIO, they come back loud and clear.

But the financial sector is still spending where it's absolutely key to the business and the Internet.

The projects have already started.

It's growing because of the Internet traffic growing et cetera, et cetera.

Where it's a new project of any kind, whether it's technology or otherwise, they're being very, very cautious in their spending.

So our pipeline in ARX still remains quite good.

But we definitely have seen significant caution when it comes to a new project and of course ARX is a very nascent market.

Thank you.

Mark Sue with RBC Capital Markets, your line is open.

Thank you.

Maybe just deal sizes and also John if you could comment on sales cycles, if that's changing.

And within deal sizes, if you can kind of normalize it, understanding VIPRION is a big part of that and whether, just your thoughts if the environment is improving, deteriorating, or still status quo on the macro.

In terms of deal sizes we saw them right around $200,000 for the quarter, which is not up too much from last quarter.

I think overall we're seeing a lot more $1 million deal sizes broadly in our business than we have -- we've seen that grow over the year, and compared to a year ago it's increased significantly.

So that, combined with VIPRION, VIPRION didn't really pull it up dramatically.

So $200,000.

In terms of the macro environment, it's pretty interesting.

We, especially in our core AD fee business, we had a solid quarter right throughout the quarter.

It really was pretty linear in nature and quite encouraging.

The other thing is we've mentioned in the past couple of quarters, actually about the fact of pipeline and how it had reduced.

It actually went back to normal levels last quarter, which is interesting.

Now, I'm not going to make any calls on that in terms of what that really means, it could mean a number of things, obviously, we're probably being more conservative in the way we factor the pipeline, just by definition.

I think we're also gaining now from the sales productivity where we see the aging of our salesforce improve.

So overall, we're pretty happy with the way things went.

Kim Watkins with JPMorgan.

Thanks for taking my question.

Just a quick follow-up on Acopia first.

Previously you adjusted guidance of 25 million to $30 million for the fiscal year.

I realize history was a little bit soft, so wanted to hear if there's any update on that?

Secondly, you called this out, but the services business continues to be really strong and you specifically mentioned professional services.

I just wanted to dig into that a little bit more and wanted to see if you could talk about how large professional services is now and what's really been driving the growth?

Is it still renewals on maintenance or primarily professional services at this point?

Thank you.

First of all, on the ARX business, yes, as we look at the ARX business at the moment we now believe it's going to be in the original forecast that we gave after the acquisition and between 25 million and $30 million and so we had been saying previously in the last couple of quarters we thought it was going to go above 30, but given last quarter's slowdown in financial, between 25 and 30.

In terms of our service business, we are talking about a pure vanilla service business, maintenance contract, general support.

And the issue there is that we're in a mission critical environment, we're seeing great renewal rates, we're seeing great attach rates.

Our deferred revenue is the highest level it's been and we've got pretty good visibility on that.

So you should expect that to remain in that strong scenario, as we move into 2009.

Troy Jensen with Piper Jaffray, your line is open.

Congrats on another nice quarter, gentlemen.

Thanks, Troy.

Just quickly, John I was wondering could you give us any framework around what VIPRION revenues would be?

Low single digit millions?

High single digits?

Any insight would be helpful.

I bet you know the answer to this one.

No.

We don't give out by individual product the numbers, but it was significant.

It did definitely have a significant effect on the quarter, and the actual order sizes -- so the general size of the overall deal is clearly much bigger than the previous products, but we're not giving out specific numbers.

Matt Robinson with Pacific Growth Equities, your line is open.

First of all, my usual debt central user question, and I know you had a real tough comparison with the big jump in the March quarter, what was that?

Then curious, you went out with more of a campaign in the application ready network solutions and I'm curious if you've seen more -- any incremental systems integration partners or any applications that really drove the numbers incrementally there?

Matt, this is Dan.

On the debt central side we're just over 29,000; we exited the quarter in terms of user count.

Then looking on the ARN side and what's going on.

I don't think we've picked up any new partners specifically but we did extend the programs that we had.

Some people, like with HP, definitely extending what we're doing with them.

We had issued a couple of press releases actually of the books and things like SAP and share point in conjunction with Web Accelerator, based on the strength of our application ready networking story and coming through partners as well.

So I think we continue to see improved traction on that front.

Paul Mansky with Citigroup, your line is open.

Great.

Thank you.

A couple questions on the 1600 and 3600.

I guess, first and foremost can you talk a little bit about the margin profile on those products relative to the legacy solutions?

Then I was hoping you could wrap a little bit more color around when in the quarter you anticipated volume ramp?

And possibly quantify it to the degree that you can, how much, if any, business you think slipped out of June into September in anticipation of that refresh?

So on the gross margin front, actually these product are going to be right in line with the legacy products.

And as we've talked about a lot when we enter design and pricing for our product line we price to margin, and they're able to do that again with these two products.

So really no change.

And in terms of business slipping, we really didn't see any significant amount of that.

The issue with that question is it's pretty subjective, because you don't always know the answer.

But our instincts are that we didn't see customers waiting in any significant manner.

Ken Muth with Robert Baird, your line is open.

Hi.

The EMEA region kind of slowed down a little bit here sequentially.

Are you seeing any slowdown, and if so, what countries would you highlight that you're seeing a little bit of softness in?

No, EMEA, we were very happy with, their year-over-year growth has been fantastic and the comparison was pretty tough but they had a pretty solid quarter.

Clearly as we go into this Q4, EMEA tends to be somewhat flat to maybe slightly up given the seasonality, but that's very normal.

So we're very, very happy with that geography.

We don't see any issues.

I think it's going to keep growing aggressively year on year.

Manny Recarey with Kaufman Brothers, your line is open.

If you can just tell me where the employees looking to hire, are you -- are those more in sales and marketing or in any other areas?

Then with the product refresh that you are looking at later in this year or calendar '09, how do you feel about customers kind of pulling back, considering the economic environment and waiting for the new products?

In terms of the hiring, Manny, I think we're going back to -- it's going to be a little bit weighted, maybe 40%ish to sales and sales support, and then the rest of it you will see split between product development and service.

In terms of product refresh, this is something we've been doing very successfully for actually over six years, you could argue eight years, but certainly over six.

We've had massive product refreshes like Buffalo Jump, VIPRION, now the 1600, the 3600.

We, without being complacent, we're very confident that we will manage future products as well.

That's not some -- I think we are very much in control.

I don't think we're going see any significant slowdown, and that's been the nature of the type of business we're in.

Rohit Chopra with Wedbush Morgan.

A couple questions.

One, can you talk about the competitive environment, maybe some pricing, anything going on over there?

Then also if you can give some more color on VIPRION, maybe the makeup of the customers, how many boxes they're buying, or something like that, just to get a sense of what's happened?

Sure, Rohit, this is Dan.

As far as the competitive environment goes, relatively unchanged in terms of what's going on with the players.

I guess the one thing that I would draw your attention to is just looking at market share statistics we continue to pick up share against folks like Cisco and Sytrex out there over the past couple of quarters.

So that's good news.

And of course, the last information that was published by Gartner, for example, was for calendar Q1.

So it's a little bit dated and we'll see the refresh of that.

But in terms of pricing environment and other types of behaviors, pretty consistent with what we've seen over the past of couple quarters.

Then with VIPRION, we've mentioned this, large Internet based companies, the big dot com type environment, there's been a really good take up there and doing some really cool applications in that type of environment.

At teleco, and especially in the mobile space as well, and also some enterprise which I mentioned in the last call, but definitely as we look over the next six months we think teleco and big Internet will continue to be the big market movers.

Samuel Wilson with JMP Securities, your line is open.

Thank you.

This is Doug Ireland for Sam Wilson.

I saw, or I was wondering on the 1600 and 3600 if you've seen any change in tone at the low end and if you expect to gain market share down that end?

Absolutely.

Maybe Dan wants to total up this answer.

We've said this a couple of times over the last -- actually over the last nine months.

Is if you look at the -- if you split a product line between the entry level which is effectively the 1500 and 3400, notably replaced with the 1600 and 3600 and then the 6400 and above.

Then we're seeing growth on the order of high 30% year-over-year, sometimes in the 40% range.

And we've been seeing a slowdown in the 15 -- 3400 range.

We're pretty convinced that one of the big issues there was the fact that a lot of other feature set, of their modules, et cetera, didn't run on those products, and that's why we changed it.

So if we could see entry level getting into a scenario where the growth was flat we'd be in a very, very good position.

So that's exactly the whole, that's the issue we're trying to address with these new products, and we think we've got a very good chance of doing that.

Because not only now are we adding the features that we're missing, but as I said, in my introduction we've introduced a product that's incredibly more reliable from an architecture point of view, and it's approximately double the performance for the same price.

Ryan Hutchinson with Lazard.

My question is around the core product revenue in the quarter.

It looks like with Acopia disappointing that the core revenue, product revenue grew around 14% year-over-year versus around 11% last quarter.

I guess what I'm trying to get at, is this fair to assume that the March quarter was at the trough and we should be expecting acceleration here moving forward with that core business?

We're not going to describe it that way, but we're very happy with the core growth.

Internally, we've been expecting our product in the core ADC to start gaining momentum.

I think we've actually said that.

I think it's very linked to the fact that we introduced VIPRION in the fiscal quarter.

I think the 1600 and the 3600 are going to help it even more, and I think the product refresh will do the same during the year.

Brent Bracelin with Pacific Crest Securities, your life is open.

Couple questions if I could.

First on deferred revenue.

Obviously $23 million sequential spike here, highest in five years by a wide degree.

What's driving that?

Is there some sort of acceleration and attach rate to maintenance contract ahead of some of these new products?

Any color on why you're seeing an acceleration there?

On the maintenance contract, this is Julian Eames, the standard contracts are growing at the rate we've seen for the last two, three years, and we've added additional services, particularly around RMA over the course of the last 18 months.

We're seeing a great pickup on that as well.

So we see that growth in deferred over those two added together.

That's helpful.

Then looking at your service provider business, obviously it looks like that had a healthy rebound.

Was that solely tied to VIPRION or was there any other factors that drove the strong sequential rebound there in service provider?

VIPRION helped it.

It wasn't a loan because we did see some (inaudible) projects in the 80, 100 front as well, but we also did see some VIPRION deals.

Saud Masud with UBS, your line is open.

Thank you for taking my question.

Guys, I just had to -- I wanted to get some color on where you're investing in terms of your headcount, where you're compelled to put more feet on the street?

Is it particular verticals, geographies, maybe you can provide some color on that?

Then I just have a follow-up on any opportunity you can share with us that could be created from this Brocade foundry transaction.

Is there anything that we should look forward to on that?

Sure.

On the sales side, this is Mark (inaudible), we talked about [40%] of the hires we're looking at this quarter coming from sales.

We're just going to invest where the growth is the greatest.

Right now we see that in EMEA, North America, and APAC.

We still have account managers out there that call on a couple of countries so there's lots of opportunity to split territories to drive up sales productivity and addressing demand that we're not getting to right now.

Regarding the Brocade foundry, we don't see any short-term effect on that acquisition.

By short-term, I'm talking about I'd be surprised if it had any significant effect on our business during fiscal '09.

We really don't compete much against either Company.

We do have some competition with ARX and Brocade's product, but it's pretty small, and we have pretty small competition with (inaudible) again, they're very, very small.

Thank you.

And our last question comes from Tim Long with Banc of America.

Your line is open.

Hi, this is [Scott Thompson] sitting in for Tim.

I think most of my questions have been asked, but maybe we hit on VIPRION versus 880.

Is there any cannibalization there?

If there is, anything you guys are doing to try to limit it?

Again, this is one of these things where there may be some, but it's very, very natural.

It's the same when we introduced the 8800 with the 8400 which was introduced after the 6800.

If you're asking is there anything that we see that is different from what we expect, absolutely not, it's been very natural.

So, yes, I think there's probably some customers that ordered VIPRION that may have -- if we hadn't produced VIPRION would have ordered some 8800's, possibly, but it's not something that's an issue in our business.

Is that it?

Yes, that was the last question.

Okay.

Thank you for joining us.

Please give us a call if you have any follow-up questions.

Thank you.

This does conclude today's conference call.

You may disconnect at this time.

Have a great day.