F5 Inc (FFIV) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to the F5 second quarter financial 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 of investor relations.

Thank you, sir, you may begin.

Thank you, Sara.

Welcome, everybody, to our conference call for the second quarter of fiscal 2009.

Speakers on today's call are John McAdam, President and CEO, and Andy Reinland, Senior VP and Chief Financial Officer.

Other members of our exec team are also with us to answer questions following our prepared comments.

If you have questions following today's call please direct them to me at 206-272-6571.

If you don't have a copy of today's press release it's 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In addition, you can access an archived version of today's live webcast on the events calendar page of our website through July 22nd.

At 4:30 p.m.

today until midnight Pacific time, April 23rd, you can also listen to a telephone replay at 866-463-4179, or 203-369-1387.

During today's call our discussion will contain forward-looking statements, including 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 described in detail on our SEC filings.

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

Now'll turn the call over to Andy Reinland.

Thank you, John.

While the economy continued to exert pressure on revenue in Q2, the cost controls we implemented during the quarter enabled to us achieve our profitability objectives and demonstrate our continued commitment to meet or exceed our operating margin targets.

As we stated in our release and conference call on April 7, revenue for the second quarter of fiscal 2009 was $154.1 million, below our guided range of $157 million to $164 million.

Despite the revenue shortfall, GAAP EPS of $0.24 per diluted share exceeded our target range of $0.19 to $0.21.

Non-GAAP EPS was $0.38 per diluted share, which was at the high end of our guided range.

Product revenue of $94.1 million represented 61% of total revenue.

Service revenue of $60 million accounted for 39%.

Book-to-bill for the quarter was below one.

North America accounted for 55% of total revenue, EMEA contributed 23%, APAC 13%, and Japan 9%.

Revenue from our core application delivery controller business was $143.5 million and accounted for 93% of total revenue.

ARX revenue was $4.5 million, representing just under 3% of total revenue, and revenue from FirePass was $6.1 million, slightly under 4%.

During Q2, telco represented 26% of total revenue, the financial sector represented 22%, and technology accounted for 20%.

US federal government was 3% of revenue, and total government accounted for 7%.

Avnet technologies was our only greater-than-10% distributor at 15.5% of total revenue.

Our GAAP gross margin for the quarter was 76.3%.

Excluding stock-based compensation of $1.3 million and a $1.3 million patent-related legal settlement, our non-GAAP gross margin was 77.9%.

One additional comment on gross margin.

It's worth noting that in Q2 we recorded a charge to product COGS of approximately $2.1 million to increase our inventory reserve related to components for our legacy platforms.

This charge had an impact of approximately 225 basis points to both GAAP and non-GAAP product margin.

GAAP operating expenses of $94.3 million were below our guided range of $100 million to $105 million.

Non-GAAP operating expenses, which exclude $12 million in stock-based compensation expense and $4.3 million of restructuring charges, were $78 million.

Our GAAP operating margin was 15.1%.

Non-GAAP operating margin, which excludes stock-based compensation expense, the restructuring charge, and the patent-related legal settlement, improved to 27.4%.

Reflecting a benefit related to the deductibility of stock-based compensation in one of our international theaters, our GAAP effective tax rate was 25.3%.

Our non-GAAP effective tax rate was 31.7%.

On the balance sheet, we generated $39.2 million in cash flow from operations, above our $35 million target for the quarter.

We ended the quarter with $499 million in cash and investments, after repurchasing approximately 1.3 million shares of our common stock for $27.4 million.

DSO improved to 53 days compared to 55 days in the prior quarter.

Inventories at quarter end were $15 million.

Deferred revenue ended the quarter at $160.5 million, an increase of $4.5 million from the prior quarter.

Capital expenditures for the quarter were $2.6 million, and depreciation and amortization expense was $7.7 million.

Headcount at quarter end was approximately 1,605 employees, a 6% reduction from the prior quarter.

Turning to our outlook, we remain very confident in the strength of our business model, our market position, and our technology leadership.

And while we are encouraged by improved close rates in March and the first three weeks of April, visibility remains a challenge and we feel it is prudent to provide a broad range of revenue guidance for the current quarter.

Accordingly, we have set a revenue target in the range of $148 million to $157 million for Q3.

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

To achieve our operating margin targets we will continue to closely manage discretionary spending while ensuring adequate investment in programs to maintain our technology and market leadership.

During Q3, GAAP operating expenses are expected to be in the range of $89 million to $95 million, including approximately $12.5 million of stock-based compensation expense.

Our GAAP EPS target is $0.22 to $0.25 per diluted share.

Excluding stock-based compensation expense our non-GAAP EPS target is $0.35 to $0.38 per diluted share.

We are forecasting an effective tax rate of 34.5%, and we expect a non-GAAP effective tax rate of 31.5%.

We estimate DSOs will be in the mid-50s, we expect inventory levels within a range of $14 million to $16 million.

and we forecast cash flow from operations will be in excess of $45 million.

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

Thanks, Andy, and good afternoon, everyone.

As I mentioned on our prerelease conference call on April 7th, we experienced a tough business environment during the second fiscal quarter.

We believe the shortfall in revenue, which occurred across all our major geographies, was directly associated with the slowdown in the economy.

We continue to enjoy a very strong competitive position in our core application global networking market and we do not believe competition was a factor.

Despite the revenue shortfall, I am very pleased that we produced solid operating profits and, in particular, delivered a non-GAAP operating margin above 27%.

We also saw continued strength in cash from operations, ending the quarter with almost $0.5 billion in cash and investments, with no debt, and that's after repurchasing is over $27 million worth of our common stock during the quarter.

And our services business continued to deliver solid sequential and year-over-year growth with another increase in deferred revenue.

I was also pleased to see a sequential increase in our file virtualization business in Q2.

Our ARX file virtualization products offer our customers a very attractive ROI by optimizing the file-based storage environment and significantly reducing their capital spending requirement and ongoing operating costs of managing their storage architecture.

As we documented in a recent press release one of our customers was able to reduce anticipated spending on disk capacity by as much as 50% to 80%.

And in an independent survey by TechValidate over half our ARX customers reported a payback of 12 months or less.

With respect to our core ADC business our product refresh initiatives are very much on track.

We are seeing good traction with the new BIG-IP 6900 system, and we continue to be pleased with the customer acceptance of our entry-level product, the BIG-IP 1600 and 3600.

Our top-end VIPRION product continues to be successful especially, when high throughput is required, including the service provider market where mobile internet traffic continues to grow dramatically, and with large internet-based applications, such as social networking.

Earlier this month we reached a significant milestone with the introduction of the BIG-IP 8900, our new high-end appliance, as well as TMOS Version 10, a landmark release supporting F5's vision of unified application and data delivery services.

TMOS Version 10 includes over 130 new features and is the most significant software release that F5 has brought to the market since our original TMOS architecture release in September, 2004.

TMOS Version 10 redefines applications, services, storage, and network resources are aligned and managed.

It provides an agile framework to integrate emerging dynamic computing models, such as virtualization, [closed] computing, and software as a service without having to completely rearchitect existing systems.

The implementation of V-10 can drive down costs by consolidating the application delivery infrastructure on a single platform, as well as providing the benefits of content and context awareness of applications running in the data center.

We believe V-10 will be a major differentiator for F5 as next-generation data centers continue to evolve in large enterprises and service providers.

As far as the outlook is concerned, we continue to have limited visibility into future business and economic conditions.

The weakness in the global economy is clearly making it difficult to forecast business, even in the near term.

Last quarter we experienced relatively strong bookings in the month of January, a steep decline in February, and although business did pick up in March, it was not enough to recover from the February shortfall.

This quarter has started relatively well, but it would be premature to make any major assumptions given the experiences over the last couple quarters.

Having said that, we expect growth once again in our services business, and we remain confident in the strength of our market position and our technology leadership, which we now believe now extends across an entire product line.

We believe that over time TMOS Version 10 will prove to be a significant driver of our business, as data centers continue to adopt virtualization functionality and closed computing architectures.

As Andy stated earlier, we are committed to maintaining our operating margins above 25%, and in spite of the formidable challenges with the global economy I continue to remain very positive about F5's strong position in the market and our future opportunities.

We are leaders in the core ADC market, our balance sheet and cash position are very strong, we enjoy significant technology leadership, and our solutions continue to maintain a strategic position in the data center, providing key infrastructure to optimize applications in both existing and new next-generation data centers.

I'd like to thank the entire F5 team and their partners for their efforts in Q2, and with that, we'll hand the call over for Q&A.

Thank you.

(Operator Instructions).

And our first question comes from Troy Jensen.

Please state your company name.

It's Piper Jaffray.

Thanks for taking the questions here.

Couple quick ones for Andy.

Andy, historically, March quarter you've always had a book-to-bill below one, something like six of the past seven years, followed up with a book-to-bill of 12:1for the June quarter, so I'm just curious if your guidance is reflecting expectations to build backlog?

Matt, you know when we give guidance it's more with the expectation of flat backlog.

All right, perfect.

And then the next one for you, Andy, on the product gross margins, down a little bit here sequentially, was that a mix issue, pricing pressure, or just absolute revenue levels?

No, as I said in my script we actually took a charge this quarter that was pretty significant, so it affected us by 225 basis points.

And then if you add into that another 140 basis points for the patent settlement I talked about you see where our gross margin on a GAAP basis was down at that 76.3%.

So those should not reoccur, and we'd expect to be back in our historical range next quarter.

Got it.

And then one for John.

John, if you think about when you guys did launch Buffalo Jump, can you give us a sense for how long it took before the new operating system started gaining momentum with customers?

Yes, obviously that was in 2004, September 2004, and these are difficult times, so I'll talk about 2004 and I'm not implying it's going to be the same in 2009.

I wish it was.

It was a pretty aggressive pickup.

In the first quarter -- the quarter after that about 25% of our business was there and then we got to about 50% of our business.

But what it did was it did, in our opinion, actually increase the market, as well, because the market grew at the same time and I'm sure that's not a coincidence.

Now TMOS was a very big architect -- Version 9 was a very big architecture change.

This isn't quite as much an architecture change with 10.

It's more of a feature -- well, a lot of features.

In fact I said it was approximately 130, so it's not quite the same product to market, and I don't want expectations thinking it's equal, but it is definitely going to, in our opinion, give us significant competitive advantage.

Got it.

Good luck, gentlemen.

Thank you.

And our next question comes from John Marchetti.

Please state your company name.

Thanks, Cowen and Company.

Just a quick question for you, Andy on the guidance.

You talked, obviously, about a much larger range this quarter.

Just curious about some of the puts and takes between the $148 million at the low end and how you get to the different ends of that guidance between the $148 million and $157 million.

What has to go right, what has to be wrong to be on either side of that?

Yes, we talked about when we go into establishing our guidance, spending a lot of time looking at our pipeline and our factored pipeline, which is the deals that we expect to close within the current quarter, and we put a lot of focus on the close rates that we've seen and the declining trends there.

And even over the last three quarters when we've had the misses that we've had, we said we've applied conservatism to that and yet again we think we've done that.

But we've also spent a lot more time going through deals with management, getting more deep with the sales management on specific deals, really diving down into setting the proper expectations for the quarter, and where it ended up was just with a wider range when we have the lack of visibility that we do.

So that put us at feeling that we needed to widen that range, took us down a little bit on the low end to the $148 million, but at the same time the $157 million, which would have some up side in it, some sequential growth, was also looking at some deals that we see out there that could provide some good up side for us.

So that's where we're at today, given the environment and led to that $9 million range.

Just to add to that, --this is John -- as Andy said, visibility is tough and it's tough in a number of ways.

If you look at the last couple quarters the patterns of business have been different.

If you go back to the end of November, we were internally feeling very bullish.

Our October and November business was extremely strong.

It was up sequentially from the previous quarter, and then we saw a real slowdown at the very end of December.

The next quarter, the one just finished, was different, where we basically saw February as being the really (inaudible) area in terms of performance and then March started to pick up.

Now as we've said, April's looking good so far, but we're not drawing any conclusions from that.

So the pattern of business isn't obvious, either.

It's not that it's all back-end loaded.

It's not quite as simple as that.

And just as a follow up to that, John, given the way the linearity did work out in the March quarter, do you get the sense that that February weakness was more from a delay of budgets getting approved by a lot of your customers, or was it just everybody's being very, very careful, one eye on the economy, while the other one is on their network?

Well, I think it -- well, they're both very similar, right.

There's no doubt in our mind that people were very, very wary in February.

The market was actually pretty down, as well.

I think there's got to be some link there.

But yes, budgets just weren't being spent in February.

And then just a last follow up on it.

To get to that higher end of the guidance that you mentioned, Andy, looking at some of the deals out there, how many of that or getting to that higher end of the range is predicated on maybe getting some earlier traction with TMOS Version 10 and the new BIG-IP?

I don't think it's as much directly related to that.

It's just some bigger deals that we've been working for a while that if everything works out right could, give us some up side this quarter.

Thank you very much.

Okay.

And our next question comes from Mark Sue.

Please state your company.

Hi, it's RBC Capital Markets.

John, by all measure, June is supposed to be a seasonally better quarter and from your dialogue, there seems to be something more than just macro.

Are there structural things going on?

Do you think the market is maybe saturated, as application switching becomes somewhat discretionary?

Any thoughts from a high level that would be helpful, John?

No, I really don't think that.

I think the value add that we do I could argue it's increasing and that's why we're still doing the technology development with things like Version 10.

So we don't feel that there's a market saturation at all.

What we're seeing, what the field is telling us -- and by the way this has been our third quarter of intense deep down work with the field and I don't think you're going to get any more intense than what we've done over the last few weeks with Mark Anderson and his team, so we've got a pretty good view of what the fields are telling us and it's pretty simple.

It's deals being pushed or the customer actually thought he could get a deal.

Sometimes we're talk about fairly senior CIOs internally making a big argument to get spend and it just not happening because the CFO or procurement are delaying it.

That's been really much across the board.

So, no, I don't think there's anything sinister in terms of our market change or anything like that.

I think it's pure economy.

If I just look at the application delivery revenues, mathematically, John, we're back to, from a product point, 2006 levels, is there any thought to add to the revenue growth?

How should we model ARX going forward?

How should we look at the other segments going forward?

Any thoughts there if just the ADC revenues are --?

Not really.

Let me ans -- I'm not going to give you the question in terms of specifics because we don't give specific forecasts by business.

But we're very, very aware internally of the fact that to have another product line in a growth mode is critical to us and ARX, in particular, we believe is the one that we can push.

We're doing a lot of stuff to make that happen.

Now, having said that, it's the same old story with ARX in the short term, which is nascent market, a lot of evangelizing, and the chances are that most organizations, certainly the greenfield organizations and that's the great majority of them, don't have budget say, so you get this great ROI, but you need to prove it at the same time, which is a tough environment.

But absolutely, we realize that ADC we still believe is a absolutely growth engine when the economy starts to pick up, but we want another one, and ARX is definitely a candidate.

Okay.

And, John, just so -- on ADC lastly on the product base -- just product, not services -- you think that's probably at the bottom now so that --?

I knew we'd get asked that question today.

We're not going to call that and we're not going to call it because of visibility.

I don't want you to read anything negative into that or positive, because visibility is a bit limited.

If you'd have asked me at the end of November for the December quarter, I'd say things were -- if we did update the quarter, which we don't, would have said things are extremely positive.

March, as I say, was reasonable.

April's starting off -- has started off reasonable.

We'll see.

Got it.

Thank you and good luck, gentlemen.

Okay, thanks.

Thank you.

Our next question comes from Ittai Kidron.

You're line is open and please state your company.

Oppenheimer.

thanks.

John, maybe first on Acopia.

Can you tell me how much has the work with Data Domain helped contribute to that business and how do you see that going forward?

Yes, we started off the partnership four months ago I think in reality is when it happened and we started off with a pretty good win.

It was a bit slow last quarter, but the stuff that actually, from a development perspective that we're working on that we think will make a big difference, and will pick up, so we've got high hopes for it, but it was limited in terms of actual numbers last quarter.

Okay.

Very good.

And Andy, with regards to the service revenue, which again, continues to grow very nicely, just by taking the midpoint of your guidance and your comment that you expect service revenue to grow again quarter over quarter implies that at the very least you're expecting a decline possibly in product revenue again in the June quarter.

When is it that you think service revenues get hurt if product doesn't reverse its course?

How would you say is your level of visibility 12 months forward into that growth pattern of services right now versus where it was two quarters ago?

The visibility I would say is still similar, but we just can't ignore the reality of what we've seen with the product growth, and obviously that's going to affect the service growth over time.

So given the assumption the product revenue doesn't start to grow, we'll see service revenue keep slowing.

I think for the next two quarters, definitely, it should still be fairly strong.

Not as strong as we saw last year but fairly strong.

Just (inaudible) -- this is Julian.

The renewal business has been going very strong, and we can see that continuing.

The initial contract business is very much linked to the product sales, so we've obviously seen a bit of a decline on that and that is a direct correlation, but we can see going forward certainly a couple of quarters the growth's still there.

And the gross margin on it, can it hold above the 80%, which you seem to have achieved this quarter?

I think over the next couple quarters it's probably going to stay in that level, just giving our expense management, it's mainly people.

So, yes..

Very good.

Good luck.

And our next question comes from Ehud Gelblum.

Please state your company.

Hi, it's JPMorgan.

A couple questions, if I could.

First of all, John, you said that the VIPRION was doing very well at telcos.

It looks like tech was up relatively well, it was up about 10% sequentially, if I do the math right.

Can you give us a sense of roughly what percent of telco is VIPRION now, what percent of everything else is VIPRION?

If you can go through the verticals and give us a sense to -- break down what percent of each vertical possibly is the high end versus low end, the refresh versus the prior products, just to give us a sense as to how the product portfolio is cycling through these verticals?

Yes, I don't have those numbers in front of me, Ehud, but certainly if you take VIPRION specifically and telco's is the best vertical we can talk about, typically the deals are pretty big so we are seeing more than $1 million transactions.

We've got a pretty strong pipeline, as well, of fairly big opportunities.

It's mainly in the mobile space.

But in terms of percentages, I just don't have that -- that with me.

Okay.

Was that large driver of that vertical?

Yes.

Without that, the vertical may not have grown as much?

Oh, no question.

Oh, yes, it was very material in telco and in the internet-based vertical.

Okay.

On the services side, how much of the growth in services of the last two, three, four quarters was in anticipation of Version 10 coming out, because I believe if you have the right maintenance service contract Version 10 is essentially free.

So how much of -- did people actually renew their subscription or perhaps move to a higher level of services subscription to get [free] Version 10 and then could that have an impact once Version 10 actually is out in the field, to the growth in that business?

It'll have no impact at all.

All software upgrades are part of a contract, whether you buy standard basic-level support, or the premium you would still get that upgrade, so there's been no change to the pattern because of Version 10.

Yes.

And in fact, overall we haven't seen a change to the pattern in terms of service renewals.

And where we -- as Julian said earlier, obviously the initial contracts go down if we don't sell the product, but in terms of renewals we haven't seen a significant pattern change, so definitely no link to V-10.

Okay.

Now that the 8900 is -- I believe it's out actually --

It is.

-- did you see any change to 8800 sales?

Did they fall off heavily in advance of that?

How does -- do you have a sense as to how the refresh is going from one set of products to the other?

The 8900 has literally just been released, so we're talking in the last couple weeks.

Now what's interesting, we already have some opportunities in the funnel where the 8900 is a great consolidator of products.

It's basically, I think -- and I'm looking around the room -- I think it's about 40% fas -- (inaudible) performance faster than the 8800.

Actually -- and this is Karl.

It's about 50% faster (inaudible) wise and 2x faster on L7 transactions.

Right, so it's clearly going to have an effect on the 8800 because it's -- the price performance is so significant, but it's only a couple weeks that it's been out.

Right.

What is the price versus the 8800?

Ehud, this is Dan.

The price is the same as the 8800.

Okay, so you get the higher performance and basically the 8800 goes away.

Was that part of the inventory write down that -- Andy, that you were talking about?

Not that specifically.

This was more for the transition across all the products, right, since we've done a refresh and going through the transition and just in anticipation of a little bit slower transition, right.

It's actually gone better than we planned and then combined with the economy just slowing down overall revenue, we ended up with component inventory that we wanted to put a bigger reserve against.

Yes.

and remember we -- over the last nine months the 1600 and 3600 have similar metrics, they replaced the 1300 and the 3400, so there's no big change with the 8900.

So would you expect any further inventory write downs of extra product or do you think you've basically taken this all into account now?

Well, I'll -- given where I am today, all things being equal, I feel like we've got it covered.

Okay.

Thank you, appreciate it.

Thank you.

And our next question comes from Brian Marshall.

Please state your company.

Great, thanks.

Broadpoint AmTech Question with regards to the revenue levels you think can support on top of your new workforce levels?

Well, first of all, if you look just at the very high level,we did a reduction of workforce of 6%.

Unfortunately, our year-over-year growth has been -- from a year-over-year perspective has been more than that, so I think we're adequately covered.

And so you think you can do revenues higher than 6%, obviously, off of a lower base?

Yes.

And with regards to the integration of additional functionality in TMOS 10 is it safe to assume that over time FirePass and Acopia will -- some of that technology will be merged, and so will C1 reported revenue line going forward?

Well -- hi, this is Karl.

The strategy always has been to take all of our different products and integrate these modules as part of our TMOS suite of prod -- basically of product, and we're -- I said this before in our [wordmap] session back in November, that we are planning on making FirePass -- or FirePass capability for technology available as part of Version 10 in the future.

So you'll be seeing that coming out.

In terms of FirePass, as it gets more and more integrated we may take the decision to just have it as part of the TMOS ADC product suite.

That would make sense and that's consistent with what we've done.

It's very unlike in the short term you'll see that with ARX.

Okay, very good.

One final question.

Any chance we can get any granularity on the high-end.

mid-range and low-end mix of BIG-IP or VIPRION?

From the level -- oh, for VIPRION?

Or you're talking across the entire product line?

What we have seen, and we go back a year, year and a half, when we brought out our entry -- new entry level products we wanted that mix shift to go back to the entry level, and provide us more opportunity that we felt we weren't seeing there, and we do feel that's happening, and we're seeing that percentage go up.

Beyond that we don't break out specific percentages.

And that's a change from a couple quarters ago, correct, when you didn't see that penetration of that new entry level product?

Well, I think we more answered at the time that it was still early days, so we didn't want to put any absolutes out there, but we feel pretty confident in what we're seeing now.

Understood.

Thank you, gentlemen.

Our next question comes from Jeff Kvaal.

Please state your company,.

Yes, it's Barclays Capital.

Thanks very much.

My question is about services.

Obviously the past several quarters service growth has been positive while the product revenues gone the other way.

Could you talk about, please, some of the drivers behind that and to what extent we would expect that to continue in the future?

I worry there will be a fall off in the service revenue commensurate, or at least in the same general direction as product revenue.

Yes, there's four constituents.

The first is consulting and training, which is the smallest piece of it, so that has probably fallen off the furthest already because that's the first discretionary spend most companies cut, so I don't think that's going to fall any further than it has.

[And this is always] a direct correlation with the product sales, so that will follow along with that.

And renewal has continued at a very strong rate.

Add to that, during this year, we have stopped the support of Version 4 and have reduced some of those contracts, so I can see the growth of renewal continuing for some time.

Okay.

So even though the product revenue is now below the run rate that it's been for the past year or, so we should still expect service revenues for several more quarters, or do you think that there's a large base of service opportunities to sell into for the next several quarters?

I think definitely for a couple more quarters.

It's not a case of looking for a base that's not contracted, because our attach rates are still very high, and have continued at that rate.

But it's making sure we convert every initial contract into renewal as the time period goes on, and we've been successful at doing that over the last five years or so.

Okay, thank you.

Our next question comes from Bill Choi.

Please state your company.

Yes, this is Munjal for Bill.

It's Jefferies.

Two questions.

Hey, guys.

One on the service business.

Are you able to increase prices on the service contracts?

Are we able to increase the prices?

We could, but I think they're in a -- that the price is positioned at not only industry standard but with what our customer base expects for the maintenance that they're getting -- if I'm understanding your question correctly.

Yes.

No, because I was wondering, in anticipation of Version 10 or are you able to -- is it like a fixed price of product sales?

Loosely, it's a rough percentage.

For standard it's roughly 15% and then premium services can add on top of that, or if they go below the standard.

But, no, I think that how it's set up is right in line with industry standards.

And does that apply to renewals, too?

Yes, one of the benefits we have is that we don't see much of a drop-off in price on renewals at all.

And second question, if Don -- or who can explain -- or Dan maybe, your relationship with Bytemobile, and I know you announced that in February.

Just if you could give us more color as to the relationship and what do you expect from it?

Yes, absolutely, Bill.

This is Dan.

So, yes, Bytemobile is a company that provides mobile optimization solutions that they sell to wireless carriers around the globe.

They've incorporated our technology as part of their solution as a way to scale it to provide better performance and high availability for it.

That's essentially the nature of the relationship there, and it's been going quite well, and the results that carriers are seeing worldwide are very, very positive and help them squeeze a lot more capacity out of their existing networks.

So it's a win all the way around.

And could you talk anything about what kind of carrier, international versus domestic, or any numbers or any quantitative measure?

Yes, no metrics, but they are talking to and penetrating carriers around the globe.

Okay.

Thank you.

Our next question comes from Jason Ader.

Please state your company.

Yes, it's William Blair.

Thank you.

One question on the April bookings commentary, John.

Can you at least give us some sense of whether the bookings activity for the first three weeks of April were kind of in line with March, or any kind of color on April bookings?

You said you were encouraged by it.

Has there been momentum, or is it just going at the same pace as March was?

We don't tend to -- where we're more interested in doing comparisons is with the January month, so --

Okay.

-- we have percentages for the first month, the second month, and they're reasonably consistent, even in these tough times.

What we're seeing so far -- remember, it's three weeks, I think I've put about three caveats already in this.

I'm going to add another one.

This is premature to make any decisions based on it.

But, for example, we're sitting here today fairly significantly above January.

Okay, great, thank you.

And then the second question for Andy, the discounting that you talked about on the prerelease, I actually didn't hear you mention it this time, but it seems like that's -- and from some of our checks it does seem like discounting has picked up, not dramatically, but definitely somewhat.

What I'm trying to figure out is how come your gross margins have held up as well as they have?

I know that you had special charges this quarter, but apples to apples, it seems like gross margins have been quite strong with the last couple quarters.

So is there like a positive force that's outweighing the negative force of discounting?

Definitely.

First and foremost, with the product transition, the new platforms carry a better gross margin for us simply, so as we transition more quickly that adds to our product margin.

At the same time, time -- and we've talked about this a lot, I think both on the call and in different one-on-one meetings -- we have our gross margin task force, a cross-functional group.

We divide up those key variables that we think have the biggest impact on gross margin, whether it's supply chain, design issues, discounting, all these different areas that we think can impact the margins, and this group has goals.

We meet he every quarter, we drive the top line as much as we can to give us the flexibility in the business, and this product transition was a part of that and we continue to do that very actively, and it's giving us benefit.

Has there been any impact from the software modules on TMOS?

Definitely.

That's actually the software module percentage sales across the boxes is one of the key variables that we track in these meetings, so -- go ahead.

And one of the things we're excited about with Version 10, I mentioned Version 10's got ike 130 features.

We cannot go through it in this call, it's too complex for that.

But one of the issues is, first of all, you can run multiple modules in the product, which obviously, allows you have more software in the box.

We've also introduced licensing for try-and-buy, which frankly was pretty difficult to do previously, so we think that's going to have -- so we think Version 10, with the feature set and the capability and the performance, should increase the number of software modules in total.

What are the most popular software modules at this point that you expect with the try-and-buy you'll be able to pick up more momentum?

I think the application security module is a really interesting one where -- because it doesn't just do application security, it does a lot of measurement capability.

It gives you a lot of performance statistics.

To be able to actually try that node rather than after significant work associated with having to try it is going to make a big difference, I think.

Web accelerator's another one where if you [feel it grows your base applications, try it.] Use web accelerator, see if you get the performance.

If you do, buy it.

That type of thing.

Great.

And then last question for you, and maybe, Dan, you can address this one.

We did hear -- I know you guys have talked about not being affected by competition but we did hear from some of the work we did in March that some of the lower-end, load-balancing solutions seemed to have picked up some more interest than normal, and maybe it's because of the economy and people are more price sensitive.

But any comment on some of the private companies or some of the smaller companies in the more generic load-balancing market and the impact they might be having on your low-end business?

Yes, the low-end business has been -- has actually picked up.

That's mainly because of the competitiveness of the 3600 on the positive side.

Probably on the negative side that's related to the economy, as well, where customers want to spend less and maybe peeling back a little bit.

And we do see some competition but it's not been significantly different over the last sir, nine months.

Okay, thank you.

Okay.

Our next question comes from Richard Sherman.

Please state your company.

Good afternoon, it's Richard Sherman, I'm MKM Partners.

A couple questions here.

First is, looking forward at the government opportunities that are starting to emerge can you maybe talk about some of the work you're doing and how you're preparing to capitalize on some of these opportunities?

Yes, and we've been -- we've added some resources in that space.

We had a tough quarter last quarter in federal, just to be fairly open about it.

It's interesting, because we talked a lot about that in our reviews last week.

We have a very strong pipeline, and that pipeline is a qualified pipeline of deals that we've effectively won.

I think the word that I had internally is that we're pregnant with opportunities.

That was the thing that stuck in my mind.

But there's been a lot of delays in spending.

Okay.

So it sounds like a decent pipeline, maybe some slow uptake but you're also adding resources there.

My other question was, with the low-end products out now, how long until that starts to positively impact your -- I think it's specifically your Japanese business?

I'm sorry, can you repeat the question?

Okay, I have this so I'll do it.

So Japanese business the actual -- so the numbers last quarter wasn't that bad.

We -- they met within their guidance.

Internally the forecast for this current quarter is down from last quarter but not appreciably, which is good news, so I think we're starting to see that already.

Yes, and this quarter is traditionally seasonally a difficult quarter for us in Japan, so I think I would say that we're pleasantly surprised with the forecast for this quarter, and I think we have a really good team there.

It seems like -- I don't know if I've got my numbers correct, but it seems like there's about, what, a 3% or 4% decline in the Japanese business, and if I remember two quarters ago or three-quarters ago I think there was some discussion about the Japanese market preferring low-end products and stackable buy-as-you-go, buy-as-you-grow approach, and then the 1600 and 3600 came out.

I guess that's what I'm trying to get at.

Is that -- it doesn't seem like that's really been a driver now for a recovery in the Japanese market with it being down again?

Well, don't forget.

The Japanese economy is very efficient economy and it's one that's reacted pretty significantly to the world economy right now, so I think in general, capital spending in Japan is significantly down.

I'd be surprised if other vendors didn't report the same kind of thing.

But I think just in the last quarter we've seen a pretty good transition from older platforms to newer platforms, and I think in Japan, in particular, we see the certification process be a little longer than perhaps in other theaters.

So I think we continue -- we'll continue to see adoption at the lower levels there.

But at the same time we morphed our go-to-market strategy in Japan, where we're actually touching end users a lot more than we were, even than a year ago.

So we've seen some VIPRION business, we're doing really well with banks and large telcos.

So I think we'll see continued improvement there.

Great.

All right, wonderful.

Thanks for your answer.

Thank you.

And our next question comes from Nikos Theodosopoulos.

Your line is open.

Yes, thank you.

Just a couple of quick questions.

If I look at the verticals, the -- I guess the other category, that seems to have the most significant sequential decline.

Is that just broad-based economic weakness?

Would you attribute it to certain sub sectors?

I think it is.

You're absolutely spot on.

If you look at the three main verticals we have they were pretty solid this quarter; telco, finance and technology, which includes the large internet, and they were solid.

And then -- but it's federal, I mentioned earlier, was weaker, and then I think just generally manufacturing was weaker, that type of area.

Okay.

The 6% workforce reduction, was that broad-based, as well?

Was it more in specific in certain specific areas of the Company?

Actually, when you look at the percentage mix of employees across the Company by function, we actually ended the quarter with exactly the same percentage mix that we started, so it was very evenly distributed across the employee base.

Okay.

And just two quick clarification questions.

The ARX and FirePass revenue numbers that you gave, are those product or combined product and service revenue numbers?

Combined.

Combined, okay.

And I think you said this but just to double check, the charges you talked about, the patent and inventory, those all flow through the product COGS, correct, not anything on the services side?

Yes, they're product COGS.

Okay, great.

Thank you.

Okay, we're going to cut it off there.

Thank you, sir, and thank you all for joining us today.

Again, if you have any follow-up questions after the call, please direct them to me.

And we'll talk to you all next quarter.

Thanks a lot.

Thank you.

And that does conclude today's call.

Thank you all for participating.

You may disconnect at this time.