F5 Inc (FFIV) 2008 Q4 法說會逐字稿

Good afternoon, and welcome to the F5 fourth quarter financial results conference call.

At this time.

all parties will be on listen-only until the question-and-answer portion.

Today's call is being recorded if anyone does have objections you may disconnect at this time.

I would now like to turn the call over to Mr.

John Eldridge, Director of Investor Relations.

Sir, you may begin.

Thank you, and welcome all of you to our conference call for the fourth quarter and fiscal year 2008.

Speakers on today's call are John McAdam, President and CEO and Andy Reinland, Senior Vice President 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 have any follow-up questions after the call, please direct them to me at 206-272-6571.

A copy of today's press release is available on our website , F5.com.

In addition, you can access an archived version of today's live webcast from the events calendar page of our website through January 21, from 4:30 p.m.

today until 5:00 p.m.

Pacific time October 23, you can also listen to a telephone replay at 800-879-7966, or 402-220-5346.

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 press release.

Our quarterly release is described in detail in our SEC filings.

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

One final note, if you are planning to attend our analyst investor meeting in Seattle on November 4, and have not registered, you can register online at www.F5.com/analyst-meeting or call Darlene Henderson at 206-272-6170.

Now I'll turn the call over to

Thank you, John.

Capping another year of growth against a back drop of a very challenging economic environment, F5's fourth quarter for fiscal year 2008 ended on a relatively positive note.

Q4 was our 23rd consecutive quarter of revenue growth.

We saw continued improvement in our non-GAAP operating margin.

We exceeded our GAAP and non-GAAP earnings guidance, and we generated record cash flow from operations of $59 million for the quarter.

Following my review of results for the fourth quarter and fiscal year 2008, I will provide guidance for Q1 and briefly discuss our goals and outlook for fiscal year 2009.

Revenue for our fiscal fourth quarter was $171.3 million, up 18% over the same quarter last year, and just over 3% from Q3.

Our book-to-bill was greater than 1.

As we stated on our October 7, call, bookings for our newly released Big-IP 3600 exceeded our forecast and we were unable to ship all orders for the product by quarter end.

If we had been able to ship these orders, revenue would have been within our guided range of 172 to $174 million and our book-to-bill would have still been greater than 1.

Revenue from our core application delivery networking business was $160.2 million, compared to $153 million in Q3 and represented 94% of total revenue.

ARX revenue was $4.7 million, down from $5.1 million in the prior quarter and represented 3% of total revenue.

FirePass revenue was 4% of total revenue, or $6.3 million, down from $7.5 million in Q3.

From a geographic perspective, the Americas represented 60% of revenue.

EMEA accounted for 20%, APAC 12% and Japan 8%.

Results in EMEA reflected a drop off in sales during the last weeks of the quarter and were below our expectations.

By vertical, Telco represented 23% of revenue during the quarter.

Technology, including large internet content providers was 22% and the financial sector accounted for 16%.

US federal government generated 8% of revenue and total government was 12%.

During Q4 we had one greater than 10% distributor, Avnet Technologies, which accounted for 15.8%.

Product revenue of $115.8 million represented 68% of total avenue.

Service revenue of $55.5 million was 32%.

Continuing down the income statement.

Gross margin in Q4 was 77.3%, including $1.2 million of stock-based compensation.

Excluding stock-based compensation, non-GAAP gross margin was 78%.

Operating expenses were $106.7 million, including $13.6 million of stock-based compensation expense and a one-time charge of $5.3 million related to office consolidation at our corporate headquarters.

GAAP operating margin was 15%.

Our non-GAAP operating margin was 26.7%, reflecting marked improvement versus our Q3 non-GAAP operating margin of 25.4%.

Our affective tax rate for the quarter was 32.4%.

Our non-GAAP affective tax rate was 32.2%.

GAAP net income for the quarter was $19.7 million or $0.24 per diluted share, above our guided range of $0.19 to $0.20.

Non-GAAP net income was $33.4 million or $0.41 per diluted share, also above our guided range of $0.38 to $0.39.

Revenue for fiscal year 2008 was $650 million, an increase of 24% over fiscal 2007.

Product revenue of $453 million was 70% of total revenue and service revenue of $197 million was 30%.

GAAP net income for fiscal 2008 was $74 million or $0.89 per diluted share.

Non-GAAP net income was $121 million or $1.45 per diluted share.

Turning to the balance sheet.

In Q4 we generated $59 million in cash flow from operations, contributing to cash and investments totaling $451million at year end.

For all of fiscal 2008 cash flow from operations totaled $194 million.

Accounts receivable DSO was 51 days, down from 53 days in the prior quarter.

Inventory of $10.1 million was up slightly from $9.7 million in the prior quarter.

Deferred revenue increased $6 million from Q3 to $145 million.

Capital expenditure for the fourth quarter were $4.7 million and depreciation and amortization expense was $6.3 million.

We ended the year with approximately 1,695 full time employees, an increase of approximately 30 over Q3.

During Q4 we repurchased $50 million of our common stock, representing approximately 1.6 million shares.

This completes the 200 million repurchase plan approved by the Board last January.

In total, we repurchased approximately 7.7 million shares of F5 common stock.

In addition, we announced today that the Board of Directors has approved the repurchase of up to an additional $200 million of the Company's outstanding common stock beginning in Q1.

Moving on to the outlook.

For the first quarter of fiscal 2009, ending December 31, we continue to believe that a robust pipeline, strong demand for VIPRION and continued momentum from our on going product refresh will drive our top line revenue during the quarter.

At the same time, there is a measure of uncertainty regarding sale cycles and close rates within the current economic environment and with that in mind we're targeting Q1 revenue in the range of 172 to $174 million.

We expect overall gross margins in the range of 77 to 78%, including approximately $1 million of stock-based compensation expense.

Our operating expense targets are $104 million to $107 million, including approximately $15.5 million in stock-based compensation expense.

Our affective tax rate for the quarter is expected to be 31%.

Excluding stock-based compensation, our non-GAAP affective tax rate is expected to be 30%.

These Q1 expected tax rates are significantly lower than our anticipated annual affective tax rates reflecting a one-time retroactive impact of the extension of the R&D tax credit.

Our Q1 GAAP earnings target is $0.26 to $0.27 per share.

Our non-GAAP earnings target is $0.41 to $0.42 per share.

We expect to maintain DSOs in the low to mid 50-day range.

We anticipate ending inventories in the range of 14 to 16 million.

We are targeting modest head count growth in Q1 with an increase of 20 to 40 employees.

And we believe we will generate cash flow from operations in excess of $60 million.

Although we do not provide specific annual guidance, I would like to share some general guidelines related to our expectations for fiscal 2009.

In previous years on the October call, we have given guidance for sequential revenue growth throughout the fiscal year.

Given the strength of our primary business drivers discussed earlier, we believe we can achieve quarterly sequential revenue growth throughout fiscal 2009 and will strive to do so.

That being said, in light of the volatile economy, we will update on a quarterly basis our views on sequential growth throughout the year.

We expect to see gross margins in our historical 77 to 78% range.

We are targeting non-GAAP operating margin between 26 and 27% throughout the fiscal year and ending 2009 at or near the high-end of this range.

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

Capital expenditures are expected to be approximately 4 to $6 million per quarter.

We expect our affective tax rates for Q2 through Q4 to average 37% on a GAAP basis, and 34% on a non-GAAP basis.

As previously stated, Q1 '09 will be significantly less than these rates due to a one-time benefit related to the R&D tax credit extension.

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

Thanks, Andy and good afternoon, everyone.

I will take a few minutes to summarize some of the highlights of fiscal 2008, comment on our Q4 performance and outline the opportunities for F5 as we move into fiscal 2009.

Clearly fiscal 2008 presented most businesses with some challenges given the overall state of the economy.

In spite of these challenges I was pleased with the F5's team performance and we made a lot of progress during the year.

We grew our revenue by 24% over fiscal 2007.

We made progress on non-GAAP operating margins, finishing the year with operating margin of 26.7% in Q4.

We continued to maintain a solid balance sheet with $451 million in cash and investments and no debt and that was after a purchase of Acopia for $210 million cash as well as buying back $200 million worth of F5 stock.

Our overall customer satisfaction levels remain very high due to our continued focus on product quality and industry-leading customer service.

Our latest quarterly customer satisfaction surveys have produced scores above 9 out of 10 in overall satisfaction.

These are world class levels.

I was pleased with results from the first year of selling our ARX range of products from Acopia acquisition.

We managed to meet the revenue expectations we set in the beginning of the year in spite of significant economic head winds in the market with considerable concentration on Wall Street and the financial vertical.

We strengthened on competitive position at our core application over the controller market with the introduction of our flagship VIPRION product.

A new entry level BIGIP 1600 and 3600 products.

Our [chase] based VIPRION products has already produced significant revenue with some exciting sale wins in the Telco market as well as sales to large internet based organizations and large corporate enterprises.

The reception to our new BIGIP 1600 and 3600 products, which we introduced last quarter has been excellent and demand exceeded our expectations for the quarter.

We have maintained a clear leadership position in the Gartner's Magic Quadrant and our application ready network strategy has been embraced by a large solution partners like Microsoft, Oracle and SAP.

And we've also made significant progress with our solutions to enable virtualization architectures, including strengthening partnerships with key players such as Microsoft and VM wear.

We'll provide more details on our partnership strategy and our road map during on analyst investor day in a few weeks.

And to give specific data on our Q4 results which we also announced a couple of weeks ago so I'll keep my comments fairly brief.

Clearly I was pleased that we were able to deliver solid profitability in the quarter as well as record cash flow from operations.

I believe this is a testament to the tight controls that we have on our business and we're committed to continuing this approach in fiscal 2009.

Although we were slightly below our revenue guidance, we continue to deliver another quarter of sequential revenue growth and we're very focused on continuing this record.

As we stated in our announcement a couple weeks ago from our geographic perspective overall sales bookings were consistent with or exceeded our internal expectations with the exception of our European results.

Where we experienced delays in deal closures in the last couple of weeks of September.

Overall, annual results from our EMEA operations were excellent and from a year-over-year growth perspective the EMEA results in Q4 were actually pretty solid.

Looking forward to fiscal 2009, clearly there are significant economic challenges facing businesses globally.

As I mentioned earlier, we will continue to manage our business on a tightly controlled and conservative basis as business conditions develop.

Andy already provided our projected revenue range for Q1.

We are very focused and continue our track record of delivering sequential revenue growth as we have done for almost six years now.

I believe our Q1 guidance is conservative but also realistic in these uncertain economic times.

Let me reiterate why I feel positive about F5's future opportunities as we move into fiscal 2009.

We enjoy a sound balance sheet and expect to continue to deliver -- continue to deliver solid results with cash from operations during the year.

Hopefully you picked up from our press release that our Board of Directors agreed to maintain a buyback program.

As Andy mentioned in his summary, we also expect to maintain healthy non-GAAP operating margins during 2009 and we will balance improvements and operating margins with investments in technology and sales development.

Our competitor position is as strong as ever and we expect to increase our competitiveness with a solid product road map of deliverables during the year.

Also we have a very strong services business with a substantial deferred revenue backlog that should be a significant growth driver throughout 2009.

Finally, we are a market leader in a key strategic real estate within the data center.

Internet traffic and file based data continue to grow at very high rates.

We continue to see customers and solution partners embrace the concept of pushing application intelligence into the application leader of the network.

Global consolidation of data centers and trends such as virtualization require the application network intelligence delivered by F5 for capabilities such as traffic control, policy making and resource provisioning.

The only way that can begin by deploying our solutions can be very significant in areas like bandwidth reduction, server capacity savings and reduction in headcount resources required to manage the data.

In addition, this (inaudible) can be obtained while making efficiencies in performance availability and security.

In summary, although we expect 2009 to have real challenges given the global economic problems that we all face in 2009, I remain very excited about the future ahead for F5.

I would like to take this opportunity to thank the entire F5 team and our partners for their efforts in 2008 and I look forward to the continued support in 2009.

We'll now hand the call over for Q&A.

(OPERATOR INSTRUCTIONS).

And our first question comes from Ittai Kidron.

Please state your name.

Oppenheimer.

Thanks guys.

I guess the skies aren't falling.

At least not yet.

John you can give color on Europe specifically, what you're seeing out there.

First of all what is your typical customer, is it smaller, relative to your average, or bigger and is there any geographical color within Europe that you can give us some strength and weakness over there.

Yes.

Absolutely.

First of all, from a customer profile, our customer profile is very exciting in Europe.

I mean, whether you're in the UK,Germany, France, Scandinavia, actually the middle east and Africa, we're seeing large fortune (inaudible) type customers so we're very confident about that, EMEA had miss step last quarter but a great year.

We actually spent a lot of time since we did the preannouncement face-to-face meetings with sales management not just conference calls and we think that we've got a pretty good handle on the business.

If you look at -- if you dissect Europe and look at this quarter, we feel very good about the opportunities in Middle East and Africa and we feel very good in southern Europe and Germany and eastern Europe and we expect the UK to see rebound as well.

So overall we feel pretty good about it.

Okay.

This was just two weeks of a deer caught in the headlight here?

No.

We expect the economy to continue to be tough.

But what we've done, we hope, and we spent a lot of time on this, we've taken a pretty conservative approach.

The think the conservative approaches comes from bottom up from sales and our only take on management level.

Very good.

And the second question is more of a strategic one with regard to your hiring plans for the year.

You can give us some color around that and some would argue that in challenged times like this, you might look into more strategic opportunities to displace your competition even more and be willing to make steps that otherwise on an on going basis might not be the best to do right now but as far as continuing to invest in your business and doing it in a way that in this time frame could put you in a much better position when exiting the market, something like for example that's been talked about, about Cisco doing that and do you see opportunities like that or do you think that at this point given the fact that the market is more of a duopoly and you're going to scare it to how demand is going to come.

First of all on head count, just to be really clear, we're going to be investing behind revenue.

We've done that every year except for 2007.

We're back doing it and expect us to continue doing that.

So very conservative, looking at the revenue and making decisions on the head count behind that.

So that (inaudible) by destination will tell you we're going to be pretty conservative there.

In terms of strategic opportunities we're viewing 2009 as a tactical year more than anything.

I don't see us making any big strategic moves.

We do not think it's appropriate right now.

We think we've got a great market in terms of the application delivery controller market, strategic real estate.

We think we have a great opportunity in the fall virtualization market, we see both of those extended in terms of the requirements the customers need and that's enough for us.

So you never say never.

Just so this is on record.

But I think it's more unlikely than likely.

Very good.

Good luck, guys.

Our next question comes from Ehud Gelblum.

Your line is open.

Hi.

Thank you so much.

First, Andy you gave your gross margin guidance saying 77 to 78% including the stock comp.

Yes.

Am I reading that right, that's up 100 basis points from the usual guidance that you've given the last couple of quarters of 76 to 77 or is this a changed basis?

No.

We're getting back to our historical levels which at the beginning of the -- the beginning of the fiscal year we had said with the Acopia, we might see 100 basis points drop and that would affect our guidance but we were going to work through that and yes, we did take it up and you're seeing us deliver on what we said we could do at the end of the year.

Is that primarily because of Acopia is contributing less than you anticipated at this point.

No.

I think there is a lot of drivers in the overall gross margin and we talked a lot about how we manage gross margin and very focused task force internally, cross functional, addressing a lot of different areas there and I think we're seeing the outcome of that as well as improvement in Acopia's overall gross margin.

Okay.

On the telecom vertical, I think you said it was 27% of revenue which I calculate --

It was 23.

It was 23% this quarter.

Okay.

Because I calculated that would have jumped up a lot.

Either way, I have it at 21% in June so it was up 5 million sequentially.

But of that 5 million sequential, was most of that sales of VIPRION or how should we look at that or is something else going on there.

This is John.

I don't know, to be honest, I don't know if it was sales of VIPRION but VIPRION is very important.

So yes, it was definitely clear in terms of the growth.

I guess more importantly, we expect it to be a continued play in Telco.

We've gotten some pretty reasonable opportunities out there in Telco with VIPRION.

WE hope to close them over the next few quarters.

So those numbers will continue to grow up.

We haven't given specific guidance on that but that's the statement we've made on VIPRION.

And if we assume in there for the VIPRION is in the order of 2, 3, 4 million, being half of that 5 million, is that right ballpark for this quarter.

We do not comment in that detail.

You know that.

I thought I would just try.

Okay.

Finally cash flow strong this quarter.

Getting even stronger next quarter.

You said revenue growth is sequentially or you'll try to raise revenue growth, revenue, I'm sorry, for each quarter for each fiscal year 2009, do you see that flat or will that fall as you fluctuate with investments?

That would be our intent for it to grow.

The one thing I would remind you is in Q2 historically we've seen Q2 drop from cash flow for operations because of timing of tax payment.

Right.

But overall we expect to see growth in cash flow from operations.

Terrific.

Thanks so much.

Thanks.

Our next question comes from the Erik Suppiger.

Place state your Company name.

Signal Hill.

Say.

You can give us a little color in terms of how your low-end products are performing.

You talked about very good adoption of the 36 and 16 hundreds but how are you seeing that -- the broader impact for the low-end products because that's been a drag for a little while.

Are you seeing the new product generate incremental business or are you seeing it more as a replacement at this point?

So we had been seeing a decline.

This is a John.

A decline on the low end entry level product and we saw that percentage stopping last quarter so we saw an improvement.

In other words the 3600 and the 1600 definitely had an affect positively and we expect that to continue.

To the point I think we said a couple of days that we were surprised about the 3600.

The interesting thing as well is where we've seen most of the 3600 business come from, and this is positive, is mainly replacements of the 3400.

So we saw the 3400 reducing and the 3600 going up, which is really good news.

So, yes, we expect that to continue.

Just to be clear, you're low end products in aggregate, they were flat sequentially or did you say that the decline -- the decline slowed down?

They were actually up sequentially.

For the aggregate of the low end products actually grew sequentially.

That's correct.

That's for the 1500, the 1600, the 3400 and the 3600 combined.

Okay.

The ARX was down again.

Last quarter you had diversified away from the financial services sector.

Any comments as to why it was weak again this quarter?

It's a very small amount, by the way, that it was down.

So it wasn't -- it was almost flat to be frank.

Not really, we're still focused on making sure that we're not just in the vertical finance and that we can go into other vehicles and I think we're making really good progress with that.

I think we're making good progress, slow but sure progress in terms of the integration of the product coming from the -- all of the F5 sales force that were only selling BIGIP.

We were just in meetings and we're definitely seeing a pipeline there and more interest growing in the core channels, the F5 sales force I should say.

So I think overall it will be a driver and a good one in fiscal '09.

It will probably be a bit tough in the first half given the comparisons but we feel very good about it.

Do you think you'll start seeing sequential growth in the first quarter.

We're very focused on making sequential product in our growth pipeline.

And Andy, did you say the tax rate for fiscal '09 would be 34% or the last three quarters would be 34%.

The last three quarters.

Okay.

Good.

Thank you.

Our next question comes from the Troy Jenson, please state your Company name.

hyper Jaffray.

A couple of questions here for Andy.

Could you talk about a gross margin profile on the two low end products, the 1600 and 3600.

Do they have higher gross margins than the replacements given they have more software content?

Yes, they have slightly higher gross margins but that's not so much driven by the software.

If we just look at them -- the stand alone platforms, comparing them straight up, it's a little bit higher.

But still in that range that we target, Troy.

Okay.

And then I know in the 10-K you guys have going to have to reveal what your back log was for the fiscal year, any chance you could share that with us here on the call.

No.

We'll leave that for the 10-K.

All right.

We'll stay tuned.

Keep up the good works.

Thanks.

Our next question comes from Ryan Hutchinson.

Please state your Company name.

Lazard Capital Markets.

It looks like product revenue was up 8%.

When you back out Acopia it was up about 6%.

So I'm just trying to get a sense in terms of modeling for core product revenue next year.

I know you would not give much in the way of color on Acopia but perhaps at a high level of how we should break out between the product and service for the year.

And just in terms of expectations, would you be disappointed if you didn't grow at 15% plus next year.

Let me answer that first of all.

I'm going to bode the answer to that.

You have the saying that where we sit today, we think can he with grow sequential each quarter but we also made a caveat that we're going to update that every quarter because of the situation we face.

I mean frankly when we go back a couple of months ago, before the Lehman, before all of the other things that happened, we felt more positive.

So we're clearly taking a more conservative approach so I'm not going to give an answer on the 15.

You're going to have to live with the data that Andy gave you.

But as I say, very focused on growing sequential and we'll see what happens.

And maybe, Andy, if you could help us understand the split between product and service next quarter.

I think we look at our deferred revenue number and obviously we feel very good about the service growth and in terms of product, we look at those key drivers that we talked about, VIPRION, the product refresh and also the pipeline as we've reviewed it with the sales force and we feel good about the product as well.

So we do not guide specifics for product and service but that's where we sit.

I have another point on that, Troy.

I mean, one of the things that you may have noted, obviously our FirePass business was down a little bit again.

I think that's very much related to the economics situation we're in where it's not a must-have type capability but remember given that happened, that means our core Big-IP slash VIPRION business was actually up.

Maybe give it one more shot, if I may.

Just in terms of looking at it between product and service, would you be disappointed the product piece was down sequential in any given quarter given the strength we've witnessed in the service business over the last seral quarters and the expectations for growth moving forward.

Yes.

I'm not going to give you a direct answer on that either.

Sorry about that.

The reason being is if you dissect our business and look at our forecast, and you look at the deferred revenue and service, that gives you a pretty good clue about what we consider to be conservative and that's why we're doing that in these times.

We're very -- product growth is obviously a key engine and that's what we're focused on doing but we're not going to give you specific statement on it by quarter at the moment.

Great.

Thanks guys, good luck.

Our next question comes from Mark Sue.

Please state your Company name.

RBC Capital market.

John, did you say you were comfortable with 14% revenue growth next year?

No.

I said that we we weren't going to give a number.

That we're very focused on that sequentially growth and we're sticking with that.

So maybe you could give us your thoughts on which verticals are customers or where you need to close to get better, which ones are lacking and where have things snapped back to somewhat normal levels just have a vertical or customer point of view?

It's interesting, if you take out financial, it's probably pretty normal across the board.

I mean we had a good Telco quarter.

Most of our drop was that 20% to 15% overall in financial.

Obviously we saw some slowness in Europe last quarter, particularly the U.K.

But generally I wouldn't say there's been a massive change.

I think the other thing that's almost unsaid is that we have a pretty big sales force out in their territories and clearly a few territory has a lot of financial in it, you're not going to be noting financial but you'll start looking elsewhere and that's what's been happening the last year and that's what we've done with ARX and so apart from financial I wouldn't say there's any massive differences.

Okay.

Got it.

And then how should we look at the upgrade from the 3400 to the 36.

Should we count what is out there, do you have a sense of how many 34 hundreds that are out there and should each unit be ripe for a upgrade.

I don't think in the short-term you'll see that.

I think it's more substitution.

In other words, people that would have board a 3400 will now buy a 3600.

And we saw that.

We saw that dramatically last quarter.

And we expect that to be almost a done deal now as we move into this quarter which is much faster than any product transition.

In terms of upgrade, that tends to take a year to sometimes three years to happen.

Now what we do expect to see is that the 1600 and the 3600 replacing maybe older products out there.

Certainly the ones before TMOS where we have 20% of the customer service base there.

So that's more of an opportunity than anything in the 3400.

Got it.

Lastly.

Andy, tax rate after the current quarter, is 31% the new number going forward?

Now for Q2 through Q4, we said to use 34%.

Okay.

Great.

Thank you, gentlemen.

Our next question comes from Jeffrey Kvaal.

Please state your Company name.

Formally Lehman, now Barclay Capital.

Andy I wasn't wondering if you would not mind thinking about your guidance for the fourth quarter.

How -- is there some way that you can help us understand the level of conservatism that you're embedding there, talking about perhaps the different in closed rate assumptions that you have or the type of book-to-bill that you usually enter a quarter with and anything along those lines would be very helpful.

This is John, actually.

Yes, I mean basically we have a pretty tried and proven technique in terms of looking at our pipeline and looking at corporate data like that.

More importantly, in my opinion, is the face-to-face reviews that we do, that Mark Anderson does with his team, which I said we completed where we take the forecast and hopefully they're being conservative and that's the feeling we get from them and to be frank we add some conservatism to that.

So that's exactly how we do it.

There's not a map to it.

It's not all science but I think its something we've proved we've got good track record with.

Thanks John.

Would it be fair so say there was an extra dose of conservatism in this particular measure than would be typical.

That would be absolutely fair to say.

Perfect.

Thank you.

Our next question comes from Samuel Wilson.

Please state your Company name.

JMP Securities.

A couple of small questions.

First R&D spending looks like it's been flat the last few quarters, I'm wondering have you scaled that back at all just because of the nature or do you like ( Inaudible)

I think it has more to do with the timing of project and coming to completion on the development of the new hardware platforms, having had VIPRION come out earlier in the year.

It's more of a timing thing.

But not a purposeful scale back of spending.

Just to be really clear on that, we're religious on the fact that we need technology leadership, especially if our market where we have a great Company like Cisco that is a competitor.

So technology leadership is always going to be important to us, so there is no change in direction.

No.

I wasn't implying that.

I was only implying that whatever timing or just conservative or what it was.

Okay.

Second.

The office consolidation, $5 million charge, is that where you thought the company would grow more over the next couple of years and you just thought you would be more conservative.

Yes.

That's right on the money.

We locked up some space that we wanted to have available to us, but obviously with the environment and being conservative, we just made the call to go and lease that out.

And lastly and I'm not trying to poke you in the eye, this one is a little poking in the eye.

On Acopia , you paid $210 million cash for it.

Is there a sense here that customers are pulling in their horns on these new technologies given the macro environment, has the computation and competitive picture changed, because the revenues are decelerating on it?

Is it the customers are blowing up.

I want to get a sense of what is

I think two things.

First of all it's not concentration of financial and affectively spreading out from that because it was very significant.

When we made the acquisition, the first quarter after that was 65% was financial of which a huge amount of that was actually Wall Street.

So some of those customer have gone away.

So that's the first thing.

Second thing is the nation market issue.

Definitely in a nation market even with a strong ROI, it is not so easy to sell.

I really want to be clear is we still feel incredible excited about the opportunity here.

It's interesting if we look internally at IT or CIO, I met with him a month ago and we reckon we hit more startup ROI from that product than any other product we use right now, in terms of higher availability, not having to buy as much disk storage from (inaudible) markets and we're investing in the road map in a pretty big way.

I think over time I think it could be as big as IT, but we're talking ten years out, but not tomorrow.

But nation market, financial vertical, the fact that we need to evangelize, (inaudible) and and I don't think it was a poke in the eye either.

That's it for my questions and I'll make a note the reason (inaudible) is missing number because you're ordering less than you're supposed to.

Thanks, guys.

Thanks, Tim.

Any more questions?

Our next question comes from the Cobb Sadler.

State your Company name.

It's Deutsche bank.

I'm trying to get an idea of how the economy if it does get slow would affect different parts of your business.

So do you think the low end refresh in VIPRION, those are, could they not grow in a really bad economy, I guess is the question and then also could you talk about how the 8,000 series might be affected.

Yes.

I mean, if IT budgets went completely frozen and all technology companies have an issue, you can't deny that.

Are we in a space where the internet continues to grow?

Absolutely.

We have an example of a purchase last week and it was a financial organization, I'm not going to say who, but a reasonably big purchase, came very, very quickly because their website was being overrun by internet traffic more than normal.

That's an example.

On one hand we're very high up on the radar screen and on the other hand we do need to look at the economy.

And we're in very, very good shape in terms of the peking order.

Watch revenue daily.

(inaudible) our IT is key for us and as we said earlier, invest behind revenue.

Got it.

So if IT spending were flat the 1600 and 3600 in VIPRION would you be able to hit your internal targets if overall IT spending were flat.

It's hard to generalize that.

IT spending is probably flat.

It probably is right now.

So that's the sort of assumptions we're making when we give guidance.

Got it.

That's where I was going.

Thanks very much.

Our next question comes from the Matt Robinson.

Please state your Company name.

Pacific Growth Equities.

Thanks for taking my questions.

Congratulation on the execution.

My usual questions start with the Dead Central users if you have that data.

Sure, Matt.

This is Dan.

We topped out the end of last quarter at 32,600 users out (inaudible)of central.

An one interesting thing is we did launch Death Central a Japanese version and that ran up to number two in terms of contributing countries for content.

So year-over-year on year we're doing pretty well.

It's up about 67% or so.

Speaking of Japan, is -- I think you said on the preannouncement conference call that the new products hadn't started to register in Japan yet.

Is there a new dynamic in Japan with a channel or anything in particular that we should be seeing as a factor and change there.

No, not at all.

That's extremely normal.

When we introduce TMOS as an example in 2004 with a lot of new products, it was almost 9 months before it started to really ramp up in Japan.

They tend to be conservative with new product and I do not think the 1600 and 3600 will be much different.

Now having said that, it's the same operating system.

We've seen amazing quality by the way with both of these products.

More quality.

In other words less issues with these products than we've seen in any product range we've ever introduced.

We think that should accelerate once that experience happens in Japan.

And then over time, as we've said, we think given the profile of Japan's business, they're going to benefit more from the 1600 and 3600 than any other geography, we're pretty sure of that over a reasonable period of time.

And then hopefully the 3600 will get more in the mode of adding software and then bringing currents up the range in Japan and that's very much the strategy we're embarked upon.

Of the three modules that run on your lower end refresh, one of them particularly strong in driving the sales?

We probably need it get back to you on that.

I know SM, the application fire module had some pretty solid rates but I don't know it was the top one.

Andy, on the cash know, how does the facility charge flow-through the cash flow statement.

Has that already been a factor or is that something that will happen over time going forward?

Well, I think as a charge, up front it's non-cash.

You're not really going to see it.

But over time what you'll see is we'll just have lower operating expenses and we'll flow-through that way.

Okay.

Thanks a lot.

Our next question comes from Bill Choi.

Please state your Company name.

Yes.

It's Jefferies and Company.

Several questions here.

First, Andy, did you explain why inventory, you expect to be up to 14 to 16 million.

I think typically it declines in the December quarter.

Yes.

That's pretty much directly tied to our product transition, right, so being ready to meet the demand that we expect to see out there, and then also in this environment a little bit, our overall inventory is pretty low.

And we want to make sure we have certain products and some parts and pieces that we want to make sure we have on hand and so we do some buys there.

On the call a couple of weeks ago, the preannouncement call I mentioned about the product refresh and there was some imminent announcements coming and we were update those on the analyst day on November the 4, but that's also -- we're gearing up for some announcements for that as well.

And also just in terms of visibility into the inventories of your distributors and also in Japan where it is two tiered, you can talk about inventory there, is everything looking fairly clean too?

And just to be clear, Japan is actually the only theater where we have inventory.

So in our other theaters where we're sell through, it doesn't matter on the inventory level or where we're sell in, we do not carry inventory.

In Japan in particular and we usually do not disclose this but we have worked that inventory down in Japan.

So that's pretty much --

Okay.

And then John, just to step back a little bit and look at one of the key drivers of your business, which is the deployment of new servers, whether for consolidation of data centers or buildout of new data centers in general, obviously you guys are still performing quite well the server guys have taken a big hit starting in the September month, whether you look at IBM or Sun Micro.

How do you feel about the tie between your products and ultimate pull through demand of the servers and if server shipments continue to weaken should we expect your products to have a bit of a slowdown, maybe a couple quarters later.

No, I don't.

And let me explain why.

Because our business is absolutely a Big IP VIPRION business is related to that; however, it's related to server consolidation and virtualization and I brought that out in my script.

You should really think of the fact that you could have a scenario where you're building a new data center, and this is very common, and you're affectively building up commodity building blocks and virtualization them with VM wear or Microsoft's product or whatever, our products in that environment have a massive volume ad so you may be reducing the number of servers but you're increasing the value add from F5 solution and the reason you're doing that is all of the value add that we do, the actual physical server, we do it in the virtual server space as well but it even requires more than that, the current value add for physical service plus the fact you have more complexity in terms of managing virtual servers, you have got provision requirements and we have a tremendous play, in fact we're a key building block there.

So no, I don't think there's a direct correlation because of the way the architectures have moved on.

But right even when you virtualize you typically do it with new servers, with systems from IBM or et cetera.

But there is typically a new server involved because they tend to be better performance, better power consumption.

So is there -- you're saying this is no real link between now server shipments and the level of business you would ultimately expect.

I think the opposite from what you're asking, which is when we get an opportunity, when we see data consolidation, we see a reduction in servers, maybe moving because of virtualization is the most common way of doing that, that's an opportunity that the F5 sales force see to sell our products because we do more value add in that space.

Okay.

One final question.

Can you talk about where average fuel sizes have gone since you guys really have moved up your new products into the higher end and new products also have higher ASP rather than the low end.

Our average still sizes has been just above 200,000.

We saw it pretty comparable quarter-over-quarter.

So yes, I think that was driven early on through the year by VIPRION and then with the strengthening of the 3600 and 1600 this last quarter.

I think it kind of balanced it out.

Okay.

Thanks so much.

One of the things we will do, just on that, is at the analyst day we're going to talk about the profile, the number of accounts that where we sell above $200,000, number of deal size so you'll get more visibility.

I know that's in Mark Anderson's presentation coming up.

Our next question comes from Jason Ader, please state your Company name.

William Blair.

Thanks.

Just two quick questions, guys.

First one of your suppliers caveat, noted some concern over demand for high end boxes in networking.

So I was just wondering whether you're seeing any lengthening of sale cycles for the higher end boxes like the 8,000 series.

Yes, no we've had a issue so.

We see VIPRION very strong.

We see our high end boxes very, very strong and we've been focused on the opposite, which is we're seeing a decline in the entry level products and that's why we introduced the 1600 and 3600 so we really haven't seen that.

I know the VIPRION was strong, but I was thinking more in terms of the 8400 and some of the others-- (inaudible)

No.

All right.

And then second question, in terms of your cautious guidance, is that kind of spread across the world at this point?

Is it in every region where you're feeling some with a cautious right now?

Could you comment on each of your major geographies and how you're feeling relative to the guidance?

It's pretty much every region.

There's no question that there is similar affects in every region.

Obviously we did brought it your attention to EMEA given what we saw at the end of the last quarter, but pretty much across the board.

Lovely.

All right.

Thanks, guys.

Our next question comes from the Jeff Evenson, place stead your Company name.

Sanford Bernstein.

As you look forward to fiscal year 2009, I can imagine you've gone through an exercise and talked about R&D head counts that needed given your product development priorities, sales force additions, et cetera.

How flexible or how much uncertainty is there in your spending plan for fiscal year 2009 in light of the economy?

Well I think it goes back to the comments that we made that we're going to approach our investments very conservatively.

And you saw that where in this quarter we said we thought we would have 40 to 60 employees and came in more at 30 because we're just being very tactical and very careful about how we'll invest and we'll be doing that through the year.

Thanks.

Our next question comes from Tim Long.

You're line is open.

Just two quick ones if I could.

First, just talk a little bit about the pricing and competitive environment.

Obviously good product cycle for you but are there concerns that competitors may see some slowing and kind of change the dynamic out there as you look out a quarter or two, and have you seen any of that yet.

And then second, as we look out 6 to 12 months, how long of a tail do we think we have with both VIPRION and the lower-end products that are new?

At what point do you think we need to see yet another new wave of products, basically another product cycle that would help keep that growth rate going on the sequential basis, thank you.

Just to go toward the end of the question.

So 1600, 3600 VIPRION, all through '09 we think they're going to be growth drivers and beyond.

Probably through '10 as well.

One of the things we're talk about in a couple of weeks, November 4, is the product road map in some detail but you're going to see a product refresh of the other products happening in 2009 and as I was saying earlier, we're going to see some of that starting imminently as well.

And we'll talk about that in a couple of weeks.

So we have a pretty strong refresh there.

In terms of the competitive environment.

Yes.

Absolutely.

Tim, this is Dan.

As far as competition goes, pricing wise, you have the occasional tactical thing going on from competitors but overall I think it's reflected in our gross margin that we haven't seen any big tectonic plate shifts out there in terms of what is going on in the competitive environment.

So I think with the refresh that we've got, with VIPRION, we're really in a very, very strong position.

Brian, let's take one more question and we'll be done.

And just to wrap up on that, we've seen pricing remain very stable.

You see that in our product margins, watching the deals come across.

We've really seen no change in deal profiles from a discount perspective either so I think that's important to note.

Again, one more question, Brian, then we'll wrap up the call.

Okay.

Our last question comes from Rohit Chopra.

Please state your Company name.

Wedbush Morgan.

And if things got really bad out there, everyone is predicting that, are there areas that you think you could cut costs orange tan not adding head count, is there certain areas that you guys are thinking you can cut cost?

You mean within F5.

Right.

Within the company.

Sure.

I mean there's always the case you can do that.

In 2000 we had to do that.

In 2000 we made some pretty significant cost cutting.

I don't think we're in the same space at all right now.

I really do not.

Having said that, trying to judge this economy is very, very difficult.

But what we're going to do is take control, invest behind revenue.

Okay.

And the other -- there's another question I had.

So back (inaudible) to you're (inaudible) very quickly as you saw things slow down, did you analyze it and sort of say was it just a complete freeze on spending or was it anything to do with the credit markets freezing up where customers couldn't actually pay you or provide advances?

Did you guys look at that?

Oh, yes.

We looked at it pretty tightly.

Yes, we did it by deal.

I mean that's the way you do that.

In other words what was forecast, why it didn't close.

Most of what we saw wasn't that sinister.

Most of what we saw was pushes.

So the great majority of the messes that we saw was pushed out.

Some of it went into this quarter and some would be delayed.

Very few went away.

And then you have to basically do your sales judgment, your sales force judgment, your execution to see where you're add but it was very deal oriented.

And the last question is why couldn't service revenues begin to slow down if customers started to pull back and not do multiyear service contracts or they just go to one year or maybe not, maybe they just not -- they just forget about renewing for a certain period or something like that?

Why couldn't that happen?

The vast majority of our contracts are one year.

We only have a few multiyear ones so that's one part of the answer.

And the other piece is if they're using our product where it's into the network, that's a big risk to go saying, I don't want to have software update and I do not want to get help, and we do not have a problem renewing.

We have to go through the debate and negotiations but we have very high renewal rates.

Thanks guys.

Thank you very much for joining us and, again, if you have any follow-up questions, give me a call and we'll make sure you get answers.

Thank you again.

Thank you.

Thank you.

That does conclude today's conference.

Thank you for joining.

You may disconnect at this time.