F5 Inc (FFIV) 2009 Q1 法說會逐字稿

Good afternoon.

Welcome to the F5 first quarter financial results conference call.

(Operator Instructions).

Today's conference is being recorded.

If anyone has any objections, please disconnect at this time.

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

Andy Reinland, Senior Vice President and Chief Finance Officer.

Sir, you may begin.

Okay.

Thank you.

Welcome to our conference call for the first quarter of fiscal 2009.

Joining me on today's call is John McAdam, President and CEO.

Members of the Senior Management Team are also with us today to respond to any questions following our prepared comments.

John Eldridge, our Director Investor Relations, has been in Washington, D.C.

for the inauguration and will be back in the office tomorrow.

If you have any questions after the call, please direct them to John 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.

You can access an archived version of today's live webcast from the events calendar page of our website through April 22.

From 4:30 p.m.

today until midnight Pacific time, January 22, you can listen to a telephone replay at 866-439-3725 or 203-369-1044.

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 for the Q1 results.

As stated in our release and conference call on January 6, revenue for the first quarter of fiscal 2009 was $165.6 million, below our guided range of $172 million to $174 million.

Despite the revenue shortfall, GAAP EPS of $0.27 per diluted share was at the high end of our guided range.

Excluding stock-based compensation expense, non-GAAP EPS was $0.40 per diluted share, just under our target of $0.41 to $0.42 per share.

Product revenue of $107.9 million represented 65% of total revenue.

Service revenue of $57.7 million accounted for 35%.

Book to bill for the quarter was below 1 as a result of timing issues related to a large shipment at quarter end.

North America accounted for 54% of total revenue.

EMEA contributed 24%, APAC 13% and Japan 9%.

Revenue from our core application delivery networking business was $155.6 million and accounted for 94% of total revenue.

ARX revenue was $3.7 million, representing just over 2% of total revenue, and revenue from FirePass was $6.3 million, slightly under 4% of total.

During Q1, Telco revenue represented 23% of total revenue.

The financial sector represented 20% and technology accounted for 17%.

US Federal Government was 4% of revenue and total government accounted for 9%.

Avnet Technologies was our only greater than 10% distributor at 17.1% of total revenue.

Moving down the income statement, GAAP gross margin of 78.2% was above our guidance of 77% to 78%.

Excluding approximately $1.2 million of stock-based compensation expense, non-GAAP gross margin was 79%.

GAAP operating expenses of $102.3 million were below our guided range of $104 million to $107 million.

Our non-GAAP operating expenses, which exclude $13.7 million in stock-based compensation expense, were $88.7 million.

Our GAAP operating margin was 16.4%.

Non-GAAP operating margin was 25.4%.

Reflecting the retroactive effect of the reinstated R&D tax credit, our GAAP effective tax rate was 28.8%.

Excluding stock-based compensation expense, our non-GAAP effective tax rate was 28.1%.

On the balance sheet, cash flow from operations was $57.9 million.

We ended the quarter with $487 million in cash and investments after repurchasing 873,000 shares of our common stock for a total of approximately $20 million.

DSO was 55 days.

Inventories at quarter end were $15.6 million.

Deferred revenue ended the quarter at $155.9 million, an increase of 7.5% from the prior quarter.

Capital expenditures for the quarter were $3.9 million and depreciation and amortization expense was $6.5 million.

We increased head count by 15 in Q1, ending the quarter with approximately 1,710 employees.

Moving on to the outlook.

Clearly the continuing economic uncertainty has reduced visibility into our end markets.

Taking this into account, and based on review of the pipeline and in-depth discussions with our Sales Management Team, we are targeting Q2 revenue in the range of $157 million to $164 million.

We expect product revenue to be down from the quarter just ended.

We expect service revenue to continue growing but we are seeing that growth slow somewhat due to the decline in product sales.

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

To maintain our operating margin targets, we have reduced discretionary spending throughout the organization.

In addition, we are restructuring and consolidating areas of our business which will result in a 5% to 7% reduction in total head count by the end of the quarter, and a reduction in certain office space.

These actions will result in a restructuring charge during the quarter in a range of $4.5 million to $5.5 million.

We will exclude this charge from our non-GAAP results for Q2.

Q2 GAAP operating expenses are expected to be in the range of $100 million to $105 million, including approximately $13 million of stock-based compensation expense and the restructuring charge of $4.5 million to $5.5 million.

Our GAAP EPS target is $0.19 to $0.21 per diluted share.

Excluding stock compensation expense and the restructuring charge, our non-GAAP EPS target is $0.36 to $0.38 per diluted share.

We are forecasting an effective tax rate of 35%.

We expect a non-GAAP effective tax rate of 32%.

We estimate DSOs will be in the mid-50s.

We expect inventory levels within a range of $14 million to $16 million, and we believe our cash flow from operations will be approximately $35 million.

This reflects an anticipated decrease over the prior quarter due to seasonality in our US federal tax payment schedule and costs related to the reorganization.

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

Thanks, Andy, and good afternoon, everyone.

Since our pre release conference call on January 6 we have focused on analyzing the reasons for the business shortfall we experienced last quarter as well as closely examining our future business prospect and pipeline of opportunities.

As we stated in the pre release call, the overall Q1 forecast appeared to be on track as we approached the final week of the quarter.

I also mentioned from a revenue perspective that Q1 revenue was tracking ahead of the previous quarter's revenue by several million dollars through late December.

In the last week of December we experienced a significant slow down in expected orders at levels we have never seen, especially in North America.

The slow down occurred across all the major regions in North America as budgets were frozen or withdrawn completely.

Our analysis of the revenue from opportunities that dropped out in Q1 indicates that approximately 60% of the revenue is forecast to close this current quarter while 20% has moved out beyond this current quarter or has been postponed indefinitely.

We are still qualifying the remaining 20%.

Clearly this scenario may change as customers continue to review their individual budget plan.

Given the trends in capital spending delays that we saw last quarter, we expect to see continued postponement of projects and reduction in spending during this quarter as well.

Apart from North America, the major geographies -- the other major geographies were pretty close to our internal expectations.

Both the EMEA and Asia Pacific regions delivered year-over-year sales growth and Japan was up sequentially over the previous quarter.

In North America we did see some weakness in our technology vertical, especially in business from our large dot-com and eCommerce customers.

As expected, our US federal business was down sequentially which is usual for the first new quarter in the year of [federal].

On a positive note the other financial metrics in the quarter remained quite strong.

We maintained solid gross margins in both our products and services business, monies that expenses towards the low end of our guided range and generated a health cash flow from operations of $57.9 million.

Once again, our services business delivered sequential growth over the previous quarter with another increase in deferred revenue.

As we have already stated, we believe the shortfall in revenue last quarter was directly associated with the slow down in the economy which resulted in IT budgets being reduced or expenditures being postponed.

We continue to enjoy a very strong competitive position in our core application delivery networking market.

We introduced new mid range BIG-IP 6900 which has been very well received in the market and continues to add to our technology leadership position across our product range.

Our new entry level products, the BIG-IP 1600 and 3600, continue to be well accepted by our customers and our high-end flagship VIPRION product continues to enjoy a significant performance leadership position with no viable competition.

Although our ARX file virtualization product sales were down sequentially from last quarter, we are seeing a gradual increase in the sales pipeline.

The ROI customers received from this solution is very strong and we expect to see some modest growth with ARX in Q2 and the second half of the year.

We also plan to announce a new comprehensive version of our ADC operating system, TMOS.

Version 10, referred to internally as Park City, is scheduled to be delivered in the next few months.

Version 10 comes with a vast array of new and improved functionality, a lot of which has originated from customer requests.

This new TMOS version should further increase our leadership position in the ADC market as well as raising the barrier to entry in our market.

We also plan to introduce our new BIG-IP 8900 product at the same time as version 10.

The BIG-IP 8900 will replace the current high end 8800 system and deliver significantly improved throughput at a very attractive price point.

As far as the current outlook is concerned, Andy indicated that we are targeting Q2 revenue in the range of $157 million to $164 million.

As Andy also mentioned, increasing weakness in the global economy is clearly making it difficult to forecast business even in the near term.

Our current Q2 revenue target includes flat to sequential declines in all the major regions.

We expect to see continued sequential increase in our services business along with healthy year-over-year growth, although we do expect to see the percentage of sequential growth decrease as our product growth continues to slow.

We remain committed to deliver strong operating margins during fiscal 2009.

We have plans in place to implement several cost saving initiatives that should product non-GAAP operating margins in the 25% range and our goal remains to deliver operating margins above 25% as we move in to the second half of the fiscal year.

In spite of the formidable challenges we expect to see with the global economic problems during fiscal 2009, I continue to remain very positive about F5's future.

Our balance sheet continues to improve and our cash balance continues to increase.

We have no debt, we enjoy competitive advantage and technology leadership in our market and our customer satisfaction levels are at an all-time high.

As I mentioned earlier, the F5 Management Team is committed to taking appropriate actions to maintain our profitability during this period of economic uncertainty.

Having said that, we will continue to make appropriate investments in our business to ensure our technology and market leadership positions remain intact and, indeed, get stronger as the economic environment improves.

I would like to thank the entire F5 team and our partners for the contribution in Q1 and, with that, we'll hand the call over for Q&A.

Thank you.

(Operator Instructions).

Our first question comes from Ittai Kidron of Oppenheimer.

Your line is open.

Hi, guys.

Ittai Kidron.

I had a couple questions.

First on your services slowdown comment, through fiscal '08 your quarterly -- on a quarterly basis you have seen sequential growth of mid to very high single digit quarter over quarter in services.

Do you still expect those services?

Although it will slow down, you still expect it to the remain positive growth from quarter to quarter through year end?

Absolutely we do.

The reason we're raising that, there's been a lot of discussion in the services business and clearly from a marked perspective, if your product growth is slowing over time that is going to affect it, the overall growth of your services business, but as we look at fiscal '09, it's sadly still going to be a sequential growth driver as well as a healthy year over year growth driver.

Can you explain the increase in gross margin in the services business.

It seems like you've had a record quarter this time around.

What was different this quarter versus others and how sustainable that is?

So primarily the gross margin on the services side is driven by head count, so a lot of it is just timing of hiring.

We had a pretty light hiring quarter as we talked about with the 15.

And we've also said many times that our target is more in the 73% to 74% range for service, but I do think we are going to see a higher service margin over the next couple quarters just related to head count.

So going back, touching on that head count comment, is the 5% to 7% reduction in head count, will that help the gross margin as well?

Andy, can you put dollars on this?

What is the quarterly OpEx savings run rate you hope to achieve and will that be fully reflected in the June quarter, I guess?

To answer the first part of the question, yes, we expect that to be part of it.

In terms of the exact dollars on OpEx, I don't have that at hand.

But more from an operating margin perspective is really our focus.

We do believe that will allow us to be at that 25% level and above as we go through the year.

Very good.

Good luck, guys.

Our next question comes from Sanjiv Wadhwani of Stifel Nicolaus.

Thank you.

A couple of quick questions.

John, could you just comment on sort of the first three weeks of Jan?

What's been your experience with deal closures?

First of all, typically January is [Dow] invested the last quarter.

That's a seasonal certainty that we've seen every year.

The next two weeks, frankly, are the important ones for us.

Actually that's one, if you like, fiscal week that's really important in terms of January goal.

But we've taken the run rate of January business very much into account in terms of a range.

In fact, that's been a factor.

So I'm not going to be that specific but pretty close to seasonal.

Got it.

Okay.

All right.

So nothing dramatically unusual compared to maybe last year, for example?

No.

As I say, we've taken that into account in our guidance.

Got it.

Andy, a couple questions on the balance sheet.

Accounts payable popped up quite a bit and so did inventories.

Any specific reasons for that?

The inventory I think was in the range that we guided and that's just with the product transition we're going through, making sure we have some specific parts on hand that we want to carry is why that increase, but nothing out of the ordinary there.

Then on the AP side, really with the federal tax payments and just gearing up preparation to make those payments, it drove up the AP side.

Got it.

All right.

Thanks so much.

Our next question comes from Troy Jensen of Piper Jaffray.

Your line is open.

Good afternoon, gentlemen.

Quick question, one for Andy.

I'll follow up with John.

Andy, just a little chatter today about you guys filing last night.

It sounds like you are looking to get authority for up to 7 million more shares for stock-based compensation.

I was wondering if you can just touch on that a bit.

Are you planning to incentivize the work force more with equity here or is that just kind of eligible shares?

How should we think about stock-base comp here in 2009?

As part of our proxy statement I think is where you saw that and part of that is going to be for ESPP, but in terms of how we look at the stock compensation, I think as a percentage we've been less than 2% annually in what we've awarded out there.

As of now, I don't know that our thinking has really changed that much on what we're looking at for annual grants.

We don't see any significant change in our incentive policy at all, Troy.

Okay.

So just the authorization is potentially there, but no change?

For future years, yes.

Multi years.

Okay.

Glad to get that out there.

John, a question for you.

Could you talk about specifically Cisco?

I know Citrix is probably the best number two player in the market, but do you see Cisco more or less active?

Anything on new products coming out of Cisco?

No.

We were discussing this this morning, actually.

We have seen Cisco less in the market place.

Have actually seen Citrix less as well.

As I say, we're very confident that the issues that we've seen are absolutely linked to the economy compared to why it has been really strong shape.

So we've actually seen Cisco less.

Perfect.

Good luck in '09, guys.

Thank you.

Next question comes from Ryan Hutchinson of Lazard.

You may ask your question.

Lazard Capital, thanks.

First off, just on the workforce reduction, it looks like it's around 85 to 120 heads, if I have that right.

Can you just break that out in terms of the parts of the organization?

Then, John, I don't want to put words in your mouth, but assuming things do get worse before they get better, are you going to take further action there?

First of all, we wouldn't break out across the organization but just about every function is involved as is, I think, probably to some degree every location.

So it's pretty general in its tone.

I'll just repeat what we said in initial to somebody on the conference call.

We're absolutely committed to maintaining those 25% margins.

We've continued to take action to do that.

Obviously you balance that with the fact that this economy will get better one of these days.

We will have a market leadership position when that happens.

But we're pretty committed.

We think we can do that with cuts and that's why we took the actions we did.

Perfect.

Maybe a follow-up to that.

There's been some channel feedback that there's been some departures in the EMEA region at a fairly high level.

Can you maybe address that?

One, if that's the case specifically as it relates to EMEA in the UK and why that took place if indeed it did on the sales side?

Sure, this is Mark Anderson.

We did change the sales leadership in EMEA.

John Williams decided to leave F5 for personal reasons, and we were able to quickly replace him with a gentleman that I have known for a long time that has been a great background, a long time at Cisco and Siemens as well.

Very confident in the leadership there.

I think the reaction from the team has been very, very strong.

Thanks, guys, good luck.

Our next question comes from Erik Suppiger from Signal Hill.

Your line is open.

Good afternoon.

Just from a product perspective you've had a chance to evaluate where the shortfall came from.

If you look at your product line, low end, mid range, and high end, were there any areas that were bigger than you had expected?

Yes, we did see a shortfall mostly in the mid range, so that the lower end was pretty good.

We probably saw some degree of cannibalization, not a lot, but some degree between the 3600 and the 6400.

However, the game is not played out yet because the [1600 and 800] really only started shipping at the end of the quarter and that's been received extremely well.

So I think that's going to be a major factor when we look at this quarter.

In the low end, did your business in aggregate grow in the low end?

I'm sure you had cannibalization of the new products replacing the old products, and you said the 36 and 1600 were good, but in aggregate did the low end products grow?

I'm not 100% sure.

We think it was maybe slight to flat, but nothing significant, Erik.

Okay.

Just to be clear, I think you said the operating margins will be greater than 25 in the second half of the year.

Does that suggest it will be less than 25% in the June quarter here?

We're definitely planning that we want to be comparable level with last quarter or better.

Okay.

All right.

Then lastly, are you expecting seasonal strength in Japan or typically they have a good fiscal year end, what do you see there?

Currently as I see it, we're currently assuming flat to maybe slightly down in just about every geography, and that includes Japan.

Okay.

So not much seasonal strength there.

Not much, no.

Very good, thank you.

Thank you.

Our next question comes from Jeff Kvaal of Barclays Capital.

Your line is open.

Thanks very much.

John, I was wondering if you could comment on the competitive landscape on two metrics.

One, could you maybe suggest why Cisco and Citrix seem to be showing up less often for you?

Then secondly, I noticed you mentioned Nortel in a release this week.

How big is that of an opportunity for you?

Regarding Cisco, I think the main way to view our market is look at our competition, which is mainly Citrix and Cisco and look at the product launches, the new products that have been introduced over the last 18 months.

We haven't seen much at all from our competition.

We've seen a significant amount from us, including almost a complete product refresh as well as VIPRION.

I also mentioned about TMOS, by the way, in version 10 which is another big leap that we think we will take there.

We've had much more focus in this market than any of those players by a long, long way.

They're involved in a lot of other bigger markets and I think that is very, very good for us.

What was the second question?

Alteon.

This is Dan Matte.

Our best estimate, Nortel Alteon product line isn't broken out specifically by most of the industry analysts right now.

The best estimate would probably be a single digit market share, probably mid single digit or so.

Okay.

Thank you.

Andy, would you mind commenting on the book to bill push out, if we should be expecting then book to bill to be better than one this quarter or what it might have been had that come in?

Relative to the book to bill, we were actually tracking that we would be better than one, then right near the end of the quarter had an emergency mis-ship that took us below, so I wouldn't look at it as an indicator of what's going to happen next quarter or not.

Okay.

Thank you very much.

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

Hi.

It's Mark Sue.

John, do you feel $157 million is the revenue base or is it possible to dip below that, or is that really not in your planning assumptions considering where you are with some of your products?

And also, John, I'm not sure what product revenues would be down sequentially if you recover a good number of deals that actually slipped from December to March.

You ask some good questions, Mark.

Obviously when we give guidance we expect that the bottom of the range is going to be the bottom of the range, and we've been normally been right in that.

We weren't correct last quarter.

But here's the way we look at the guidance.

We look very closely at the pipeline.

We've talked about this before actually, externally.

We also look at what we call the factive pipeline.

That's the forecasted run of business.

We look at the percentage of close and actually we've talked about during the last year actually about factive close dropping.

It actually dropped pretty materially last quarter.

[FUT] another drop in that factor pipeline, that takes us to the bottom of the range.

Basically we maintain the Q4 factive pipeline percentage rate closed, that will take us towards the top of the range, and that's the metrics that we use.

Okay.

John, from your customer discussions, do you feel the products are becoming more discretionary?

And I ask since you have a lot of new products, you are gaining market share, yet revenues are contracting.

Do you feel you are moving lower in the ladder of IT budgets, or is it -- ?

Clearly, we've discussed that a lot internally.

That's a really hard question to answer and let me tell you why.

First of all, just to remind everybody, we really had a very strong October and November.

So we're coming into December where we really hadn't seen any -- in fact, we were tracking above the previous quarter so that puts it in perspective.

Most of the shortfall happened right at the end within effectively days to go of the last week of the quarter.

So there's not much trend there to make that type of assumption.

Our products produce great ROI across the board.

If somebody is building a data center, we add tremendous value and I don't see that changing.

The other area that's worth thinking about that we talked about is we did see in the financial vertical and we didn't say this in the pre release because we hadn't analyzed it -- sorry, in the technology vertical, the large dot-com, a few small/large customers definitely reduced spending, so that's more specific than the overall market.

Okay.

That's helpful.

Thank you, gentlemen.

Good luck.

Our next question from Rohit Chopra of Wedbush Morgan.

Your line is open.

First I have a question from Matt Robison who is now part of our team.

He wanted to know exactly how many DevCentral users there were.

Sure, Rohit, this is Dan Matte.

The answer for Matt is 36,942.

Yes, I knew you'd have that at your fingertips and I know he's listening.

We thought we wouldn't be asked the question today.

No, we wouldn't let that happen to you.

I had three questions.

One, maybe I'll just direct this one to Andy.

Am I looking at this correctly that the allowance for doubtful accounts went up fairly significantly if you look at it year-over-year or even sequentially?

Yes, it did go up.

Really, that was targeted to a specific situation we had in one of our emerging markets, but I wouldn't look at it as anything systemic there.

It was just something we wanted to get covered.

Okay.

And then maybe this one would go to John, but can you comment on -- and I think a lot of people have figured this out, but are services going to be going direct or is that plan underway, and is there some revenue threshold that you are forcing on some of your channel partners, and maybe talk about how you are managing the channel feedback there.

This is Julian.

Yes, on the services plan we have changed the model piece.

We're not really going direct but we have changed the discounts given to some of the resellers and cut them out in terms of the distributors.

It's really looking at where they're adding value and where they're not.

But the major resellers that we have worked with have had lots of discussions with, and those were effective the first of January.

Is that causing any strange feedback or some consternation with the channel?

Is there any -- ?

We've had some discussions recently with some and we've adjusted the program a little bit.

There will be more changes but related to the whole program coming out of the future.

If I could just add to that what we're trying to do here is adapt to what our customers need and to what's best for F5 and our shareholders.

So I think we have a responsibility to do that every year, and we've made changes in our channel program pretty much every year.

So this is really along the lines of that.

This is really just adapting to the market and adapting to what our customers are asking to us do.

This wouldn't contribute to the services slowdown at all, or is there any component of this?

I'm looking forward to a little bit more of a speed-up going forward if we make it right.

My last question is really at the low end, and I remember when the products were being introduced I think one of the positives was that you would be able to penetrate the Japanese market a little bit more because they're not looking for highly technical products because of the two-tiered distribution model, and can you talk about the penetration there?

Is it being well received?

Is there anything we can look to in the future?

Is there any change or positive change there?

Yes.

The short answer is yes.

First of all, we're still very early days with the entry level products in Japan.

I mentioned a couple times they're very conservative.

We are starting to ship the entry level products here now, but it's early days, but we do see up side.

Japan in general, this was sequential growth last quarter which was very important because they had sequential declines for a number of quarters previously so we're happy with that.

And when you look forward to the this coming quarter and moving forward, actually the year-over-year growth should look better mainly because it's easier comparisons, but they should start to move into year-over-year growth and the entry level is going to help that.

What the entry level -- what we're really focused on is getting them to sell more added value, not just load balancing.

So therefore modules then take us up the chain and not just at the low end.

Thanks, guys.

Okay.

Our next question comes from Jeff Evanson of Sanford Bernstein.

Your line is open.

Thanks.

Couple questions related to the Nortel rebate that you announced earlier this week.

One is, the rebate is up to $9,000.

What is your targeted percentage of your product cost that that would typically be and, second, where do you account for that on your income statement?

Is that going to be a sales and marketing expense or do you put it as the price and reflect it in COGS?

In terms of where to get reflected, it would go -- it would bring down the revenue on the deal.

It's just part of a discount with the deal.

Then in terms -- less than 5%, just off the top of my head on the cost.

Okay, good, thanks.

And lastly, when it was mentioned that Nortel's market share is only single digits today, I think that's certainly true in the current market, but if we look back four to five years they were in the mid teens.

Are you also giving rebates on those older products?

Oh, absolutely.

I mean, the focus on Nortel really isn't just something we woke up last quarter and decided to do.

This is something that we've systematically been doing over the last several years, and I think the market share numbers reflect that.

So we're looking at legacy Nortel customers as we have for the last couple years and just going after them a little bit more aggressively now.

Thanks.

Our next question comes from Richard Sherman of MKM Partners.

Your line is open.

Good afternoon.

My question is about the WAN product.

Will that be shut down as part of the kind of right-sizing cost control efforts?

No, it won't.

That's very much linked to version 10 that I talked about.

As I said, version 10 is due to come out in a few months.

That's where we have effectively the one as a module with on top of TMOS, and that's still very much part of the plan.

The rest of my questions were answered.

Thank you, John.

Our next question comes from Ken Muth of Robert W.

Baird.

Could you share with us the total number of customers you have in the VIPRION product portfolio and how many are adding a quarter?

No, we don't give those numbers out actually, but we still remain very happy with VIPRION.

The pipeline for this coming quarter is looking good as well so -- but we don't give those specific numbers out.

Okay.

I imagine the dot-coms that you talked about in the tech, and that was down meaningfully sequentially, I would assume.

Is that seeing a pause in the cloud computing area, would you --?

This is specific customers and data center rollouts.

I won't get into it in any more detail, but it's a few customers and it was a fairly big difference quarter over quarter.

We thought it was appropriate to highlight that.

Okay.

Then kind of what are your -- we continue to see kind of a downturn on the Acopia product.

What are your thoughts on trying to maybe get that around?

Yes, in fact I mentioned that.

It was a pretty slight downturn, but what we are seeing, we're finally seeing some of the integration happening better, seeing a stronger pipeline.

We think we're going to see some small but growth quarter on quarter, and that's going to get healthier as we get to the second half.

What about the number of customers for that product portfolio?

Anything you can kind of share with us there?

Not really.

It was over 100 when we did the acquisition.

I don't actually know the numbers, I'm afraid.

Okay.

Thank you much.

We'll go ahead and make this next question our last question.

Our last question comes from Edward Gelblum of JPMorgan.

Hi.

Thanks.

It's (inaudible).

Thank you for getting me in.

John, you mentioned that you weren't giving out numbers for VIPRION.

You did give out the ARX at 3.4 million, I think you said it was.

Should we assume that the VIPRION has not quite hit that level yet or you would let us know it's started to hit stride?

I'm not going to give the numbers for VIPRION.

It's typically above that number, by the way.

But the reason we don't do that we've historically given out numbers when we've done an acquisition for a period of about a year, and that's really what we're doing with ARX.

Okay.

So VIPRION is above that.

We see VIPRION as very much part of the -- as part of the ADC BIG-IP family.

Right.

Just much, much larger.

Andy, on the operating margin, last conference call you said you were looking at 26% to 27% gross operating margin, non-GAAP operating margin throughout the year, ending at the high end.

Now you are saying 25% plus.

Is that just the change in revenue level that is sort of bringing down your level of confidence in the operating margin expansion?

Definitely the results from Q1 weren't expected.

In fact, as John said, not only in bookings but as we came into the December quarter we thought we were going to exceed that guidance on operating margin and then just the end result in revenue put us at that 25.4%, and I think our comments on the call on January 6 around operating margin was acknowledging that situation and saying at this revenue level, yes, the 25% range is kind of what we're targeted into, but we have every expectation in the latter half of the year to get back up into that 26% to 27% range we talked about.

And that would be a function purely of revenue or is it head count reduction as well?

I think the comments on the cost cuttings that we're making and that we're doing is meant to impact that and, of course, revenue going up we hope will help drive it there, too.

In case I'm understanding, just to be specific, we haven't got any plans to do more headcount reduction than we've announced today.

Right.

Just this.

But that will help you get back in the 26% to 27% range and possibly a lower revenue total than you were looking at earlier.

Absolutely.

If I can put two things together that we mentioned earlier, the shortfall this quarter, because of what happened at the end of December, was roughly around $7 million versus your previous guidance, 60% of that or roughly $4 million plus seemed to have gotten pushed into this March quarter.

So your guidance now, should we be looking at $4 million that it is sort of padded a little bit, the $4 million sort of a run rate, as we look further into June, etc., should be sort of $4 million below -- ?

That's not really the way to look at it.

As I was saying earlier that we take the total pipeline, which includes stuff that's moved in, but the total pipeline which is a pretty significant number, and that number has slipped in, moved in from the quarter, a small portion of.

We look at that, we look at the close rates of the fact that the forecasted deals, that's the key for us.

That's where we get our range from.

Okay.

On the converse side the fact that the doubtful accounts went up by 2.7 million, that's still about 150 basis points of margin this quarter, give or take.

Should we, therefore, -- that's only a one-time occurrence.

So then we should be looking at that as a source of margin expansion.

You could have done a 26.5%, 27% right now if you hadn't taken the doubtful accounts.

Definitely the increase there impacted our overall outcome.

Unless your revenue from some of those emerging markets expands in future quarters, that's a one-time issue.

Yes, I would say that's one time.

Okay.

And finally, if I could, your cash flow, which has been consistently very strong, $59 million last quarter, $57 million this quarter, you are guiding to, I think you said $35 million next quarter.

Is that -- so that's a drop of, I don't know, call it $12 million to $14 million off of what you could have been, otherwise would have been.

The factors that are going to hit us is in this quarter we are going to have approaching $20 million of US federal tax payments greater than we had last quarter, then also as part of the restructuring that I talked about there's going to be costs related to that.

So those are factored into that outcome.

That's where I was going.

What is the cash cost of those -- you said you have a $4.5 million to $5.5 million charge for the restructuring.

What's the cash component of that that ends up in the quarter?

Similar?

I don't have the exact number.

I know what you are getting at because a big component of it is going to be related to the offices and the cash doesn't go out right away but an estimate it's going to be at least a couple million dollars.

So the tax part is the majority that --

Yes.

And what should it look like if we go into June assuming nothing else but just a flat to up revenue number?

Should it bounce back into the 55 plus range?

We haven't looked at that yet but obviously that would be our expectations.

We had a very similar profile last year, by the way.

Very similar profile.

So the cash tax part is really what kind of eats into you in the beginning of the calendar year.

Yes.

Okay.

I appreciate it.

Thank you.

All right.

With that, we'll wrap up the conference call.

Thank you very much, for calling in, and we'll see you next quarter.