F5 Inc (FFIV) 2009 Q3 法說會逐字稿

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

(Operator Instructions).

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

John Eldridge, Director of Investor Relations.

Sir, you may begin.

Thank you, Tamara.

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

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

Other members of our Executive 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 is available on our website.

In addition, you can access an archived version of today's live webcast from the events calendar page of our website through October 21st.

From 4:30 today until midnight Pacific time July 23rd, you can also listen to a telephone replay at 866-470-8793 or 203-369-1493.

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 described in detail in our SEC filings.

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

Now I'll turn the call over to Andy Reinland.

Thank you, John.

Revenue for the third quarter of fiscal 2009 was $158.2 million, above our guided range of $148 million to $157 million.

GAAP EPS of $0.29 per diluted share was above our guided range of $0.22 to $0.25.

Excluding stock-based compensation expense, non-GAAP EPS of $0.40 per diluted share was also above our guidance of $0.35 to $0.38.

Product revenue of $95.6 million represented 60% of total revenue.

Service revenue of $62.6 million accounted for 40%.

Our book-to-bill for the quarter was greater than one.

On a geographic basis, the Americas represented 56% of total revenue, EMEA accounted for 23%, APAC, 13%, and Japan, 8%.

Revenue from our core Application Delivery Networking business was $147.9 million, and accounted for 93% of total revenue.

Revenue from our ARX file virtualization products was $5 million, up sequentially from Q2 and accounted for 3% of total revenue.

At $5.4 million, revenue from FirePass was down from Q2 and also represented 3% of total revenue.

During Q3, Telco was our strongest vertical at 25% of total revenue.

The financial sector accounted for 21%.

Technology, 17%, and US federal, 5%.

Total government was 10%.

During Q3, Avnet technologies was our only greater than 10% distributor at 15.2% of total revenue.

Moving down the income statement, GAAP gross margin in Q3 was 78.7%.

Excluding approximately $1.2 million of stock-based compensation expense, non-GAAP gross margin was 79.5%.

GAAP operating expenses of $93.3 million were within our target range of $89 million to $95 million.

Non-GAAP operating expenses, which exclude $11.3 million of stock-based compensation expense, were $81.9 million.

GAAP operating margin was 19.8%.

Non-GAAP operating margin, which excludes stock-based compensation expense, was 27.7%.

Our GAAP effective tax rate was 33.7%.

Excluding stock-based compensation, our non-GAAP effective tax rate was 31.9%.

On the balance sheet, we ended the quarter with $538 million in cash and investments.

Cash flow from operations was $46.2 million.

Also, during the quarter, we repurchased 464,000 shares of our common stock for $15.9 million.

Accounts receivable DSO ended the period at 52 days.

Inventories at quarter end were $13.6 million.

Deferred revenue increased 6% from the prior quarter to $169.9 million.

Capital expenditures for the quarter were $1.8 million and depreciation and amortization expense was $6.2 million.

We ended the quarter with approximately 1605 employees, flat with Q2.

Moving on to the outlook, while we continue to be cautious in analyzing and managing our business in the current environment, we are encouraged by our Q3 results and the prospects for Q4.

We are targeting Q4 revenue in the range of $160 million to $164 million.

We expect GAAP gross margin in the 78% to 79% range.

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

We anticipate GAAP operating expenses in the range of $96 million to $100 million.

This includes approximately $14.5 million of stock-based compensation expense.

Our GAAP EPS target is $0.26 to $0.28 per diluted share.

Excluding stock compensation, our non-GAAP EPS target is $0.40 to $0.42 per diluted share.

We are forecasting an effective tax rate of 35%.

Excluding stock-based compensation, we expect a non-GAAP effective tax rate of 33%.

We plan to increase our headcount by 25 to 50 employees in the current quarter.

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

We expect inventory levels within a range of $13 million to $15 million and we believe our cash flow from operations will be in excess of $50 million.

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

Thanks Andy and good afternoon everyone.

Overall I was very pleased with our performance in the quarter.

All our key financial metrics were positive when compared to the previous two quarters.

We delivered sequential quarterly revenue growth and more importantly, we saw a sequential increase in product revenue growth in both our core ADC business and our ARX business.

We remain convinced that our ADC products occupy strategic real estate within the data center and offer a compelling ROI for our customers.

We also believe that our ARX file virtualization products offer an equally attractive ROI by optimizing file-based storage environments.

We continue to produce solid operating profits with a sequential increase in non-GAAP operating margins to almost 28% and generate strong cash from operations above $45 million.

From a geography perspective, our North American operations had a very good quarter, producing solid sequential growth across most of the regions.

Asia-Pacific operations had a solid quarter and Japan was also slightly above our expectations during the seasonally weak first fiscal quarter.

Overall, EMEA operations were flat from the previous quarter, but we did see some weakness in our UK operations for a few relatively large transactions failed to close during the quarter.

Our services business yet again produced sequential growth with another sizable increase in deferred revenue.

From a product perspective, we were very satisfied with the acceptance of our new ADC product by our customers.

We have seen positive results across the product line from the entry-level product, up to and including our flagship VIPRION products.

Our new software release of TMOS version 10 has also been very well received and we believe that V-10 has significantly increased our competitive leadership in our core ADC market.

Our new data manager solution and the file virtualization space is also proving to be very popular with our customers and partners.

Data manager also discovers key attributes about (inaudible) file storage environments and presents a comprehensive view of how files are being used, allowing our customers to quickly see how they can optimize their environment.

Customers can get a detailed look into the file storage environment, including which file types are being created, who is creating them, how quickly files age and which resources the files consume.

Indeed, overall our -- our overall product road map includes a number of very exciting new product and software developments, many of which are specifically designed for data center architectures of the future, as we see continued movement to wage scale consolidation, leveraging virtualization technologies and cloud-based architectures.

Our plan includes new products leveraging our clustered multi-processing architecture, an upgrade to the VIPRION blade with significantly improved performance and a host of new software functionality.

As far as the current outlook is concerned, Andy indicated that we expect to see continued sequential growth in fiscal Q4.

Q4 tends to be seasonally strong in American operations including our federal business.

We expect Japan and Asia-Pacific to produce sequential growth over last quarter and EMEA to be seasonally flat to maybe slightly down.

We expect our services business to be up again sequentially driven by the healthy gain in deferred revenue last quarter.

We plan to invest in the future as we see revenue growth returning mainly in sales, services and product development headcount.

However, we will maintain our cautious approach on investment and our plan is to invest behind revenue as we have done in the past.

Given our current range of revenue guidance, we would expect operating margins to be flat to slightly up in Q4 from last quarter.

As we have done in the past, we will update our longer term planning assumptions on our annual call in October.

As I stated earlier, we're convinced that F5 products play a strategic role in data center architectures, both now and in the future.

We enjoy a significant market leadership position in the overall Application Delivery Networking market.

Our balance sheet and cash position remains very strong.

We continue to be cautious given the formidable challenges with the global economy.

We also believe that as the economy improves we will experience accelerated growth in our business given our significant market and technology leadership position.

I would like to thank the entire F5 team and their partners for their efforts for Q3 and with that, we will hand the call over for Q&A.

Thank you.

(Operator Instructions).

Our first question comes from Jason Ader with William Blair.

You may ask your question.

Yes, thank you.

John, given the strong results for the quarter and the guidance, is it fair to say that you're kind of back on track with kind of the normal backlog in the business?

In terms of the -- do you mean the pipeline, Jason?

The pipeline of business?

Well, no, I mean the actual backlog where you have bookings, but you haven't shipped it yet.

I know historically F5 historically has had some level of backlog.

Yes, I understand.

We don't give that specific data.

We obviously will do that at the end of the year, but the book-to-bill, the product book-to-bill was up last quarter.

In terms of the pipeline, we feel pretty good about that, actually.

Okay.

And then on the headcount, you said you were going to add 25 to 50 people.

Do you feel understaffed right now?

How are you overall feeling about the business?

I guess I'm just trying to get a sense.

I know you said you're going to invest behind revenue, but are we talking about kind of a near term high point in the operating margin around 28% -- 28-ish percent and then next year we start to dip down again as you invest?

Or is it just going to be dependent on revenue next year in terms of how you think about that investment?

Yes, I mean, first of all, I don't think we're understaffed at all.

Obviously, we expect to accrue, as we said, between 25 and 50 this quarter.

If you look at the productivity levels, anybody could do that, looking at the number of people we've got in the Company and the revenues, you could argue that there's definitely room for productivity increases and that's what we expect.

But, having said that, we still see opportunities in places like the emerging markets, some of the bigger current areas, federal, so we are still going to increase, but we don't think we've got any significant underinvesting going on.

Okay.

So operating margins for next year, I mean I guess it's too early to say but --

Yes, we'll talk about that in October.

But having said that, I think it's very likely that you'll see us in the same modus operandi which is investing behind revenue.

Okay.

Thanks, guys.

Thank you.

Our next question comes from Brian Modoff with Deutsche Bank.

You may ask your question.

Yes, hi, John.

This is Vijay [Vigabahn] calling on behalf of Brian.

Hi.

Just two questions.

The first is in terms of any thoughts on your partnership strategy?

How would you like to leverage your partners from a go-to market perspective for both ARX and application networking portfolio?

And then the next question is around the competitive outlook, how do you see kind of the relative competitive position versus Cisco, Citrix, Riverbed and others?

Yes, sure, Vijay, this is Dan Matte speaking.

Hi, Dan.

As far as the partnership piece goes on the Application Delivery Networking and ARX, really we've been pretty consistent so we're going to do more of what we have been doing.

So, been working with some large partners, the HPs and the IBMs and folks like that around the world.

Dell, of course, has been a very consistent partner for us over the years and then as well, as far as our reseller partners go, you may have seen we revamped our partner program probably about 45 days or 60 days ago and we think that that will actually help improve our position with our partners out there on the application delivery networking front.

On the ARX, the file virtualization standpoint, really what we've been doing is actually focusing in North America, especially on a smaller number of partners who are more specialists in the field and really helping to work to make them the experts in North America at this technology and so again, that's a fairly new effort out there and I look forward to great things from that.

And regarding the competitive landscape -- this is John.

I mean, first of all, in our core market, ADC market, we believe we've got a really strong competitive position, especially with the new products that we've just refreshed.

I mentioned the road map that which we'll go through in October and November in some more detail, but that's also pretty exciting as well, along with V-10 and the software upgrades that we've done there.

Cisco and Citrix remain the main players.

We really haven't seen much change there.

We did our business review with the North American sales management on Monday and in fact arguably, we've seen that competitive site (inaudible) actually drop slightly so no major change in the competitive environment and we feel pretty good about it and I think that's reflected as well in the high margins that you're seeing and the high margins that we're forecasting.

If I could ask a follow-up, John.

Yes.

In terms of the cloud, John, do you see that kind of as a net new opportunity or it's more of an extension of the data center opportunity you've been pursuing?

Maybe you could answer that question in the context of your portfolio?

Yes.

I think it's both, actually.

So, it's certainly an extension of what we're doing in the sense that it tends to -- the architectures look like the large consolidated data center and we have very strategic building blocks in that, but from a new perspective, it's definitely there as well.

There's a host of new partners that we're working with that generate cloud solutions so we see it as both.

Okay.

Thanks John.

Thanks, Dan.

Thank you.

Our next question comes from Mark Su with RBC Capital Markets.

You may ask your question.

Thank you.

The sequential rebound in product revenues, is there any specific product line that's driving that?

Is it VIPRION?

Is it the 8900?

And are you seeing sequential product unit growth in addition to product revenue growth?

Yes, it's been across the board, Mark.

Frankly, it's been the economy.

The combination of a product refresh, a great competitive position, but we right through the quarter we've seen a different environment.

We're obviously cautious as we move forward, but last quarter was very predictable, very linear and it was across the product range and as I mentioned from the geography perspective, it was mainly across all the geographies as well.

Got it.

And John, would a good start in the month of July, maybe if you could just talk about the sustainability of the sequential growth and product revenues going forward?

Yes, last quarter we were specific on the months and we're going back now to our normal modus operandi, not really going to talk about that now during the quarter.

Now, having said that -- and the reason for that is that -- the reason we did it last quarter, we missed a couple of quarters, we felt it was appropriate.

We want to go back to the current modus operandi, which is really not to update the quarter.

Having said that, this is very important what I'm going to say, when we do our guidance, one of the major drivers of our guidance, one of the key drivers is how we're actually doing, the run rate of business in the first months and the forecast for the month and we've clearly taken that into a case, we've done the guidance.

Thanks, gentlemen.

Thank you.

Thank you.

Our next question comes from Ryan Hutchinson with Lazard Capital Markets.

You may ask your question.

Great.

Thanks, guys.

Nice to see the product revenue growth here accelerating.

I guess a couple questions.

One sort of a follow-up.

In terms of looking at sort of the close rates, how much did the close rates improve in the quarter and then specifically as it relates to the guidance, have your assumptions changed materially as it relates to the guidance for the September quarter and the close rate assumptions?

On the close rate?

Sure, this is Mark Anderson, how you doing?

Great.

Good.

So, in terms of the close rates, I think we saw for the first time in several quarters, an increase in close rates and also an increase in our pipeline, our gross pipeline.

That's really encouraging and like John said earlier, we saw that throughout the quarter as we take snapshots at different points in time.

So, we're very happy with the metrics on close rates and very happy with the metrics on the percentage win rates against our competitors, which John mentioned in North America, but across the world they've actually gone up for each competitor, our major competitors.

Have your close rate assumptions I guess changed as it relates to how you formulate the guidance?

We've used the exact same assumptions for last quarter as we've done for this quarter in doing the guidance.

We feel hopefully that we're being appropriately cautious.

Okay.

And then one more and I'll jump back in the queue.

As it relates to a lot of the stuff that Cisco's been doing in the marketplace, with the introduction of the blade servers, et cetera, have you seen any strengthening of your relationships specifically with HP in the Pro Curve One alliance and if you had, provide some color there?

If you haven't, do you expect that you will?

Yes, we feel very, very good about the opportunities that we've got really with Hewlett-Packard, with Dell, with IBM, because we can definitely add value in the scenario where they're competing on the server basis and we've been working with Dell, for example for years, where they've been a top five and yes, I think those dynamics are only strengthening these partnerships.

Thanks, guys.

Good luck.

Thank you.

Our next question comes from Brent Brison with Pacific Crest.

You may ask your question.

Thank you.

John, wanted to really follow-up on the drivers here.

It sounds like the sequential rebound that you saw you're attributing to more of an industry rebound, improving economy, versus share gains.

One, at what point do you feel maybe a little bit more confident in saying when you expect to actually take some share?

Two, we're 90 days into the Version 10 release.

What's the customer feedback?

Was it a material part of the BIG IP revenue mix this quarter and if not when do you expect to get to that more than half of your shipments will be on Version 10?

Obviously, we can't comment on share because we don't know the data for this quarter, but as you heard, our competitive win rates are as high as they've been so that would indicate that there's definitely an opportunity for gaining market share, but frankly until we see the results, we can't really comment on that.

In terms of the product and how it's driving wins, no question the whole product refresh is happening.

There's a big interest building in Version 10.

I wouldn't say it was incredibly significant from last quarter because it's a new operating system, but it's certainly going to be in the future quarters.

And then my last question here, as you think about kind of the environment that we're in, it certainly looks like a bottoming and a potential recovery here.

Do you plan on being a little bit more offensive?

Obviously, you have a very strong balance sheet.

How should we think about F5 and the strategy going forward?

Is there anything that you're looking at doing, maybe perhaps a little bit more offensively through M&A or something that you could help position you coming out of this downturn?

Yes, I don't think so, is the quick answer to that.

We're going to be having an Analyst/Investor Day in November and obviously we'll go through a lot of our strategy there and we have a lot of organic, pretty exciting organic plans in place.

We're not at a stage where we refurbished a product line, refreshed a product line and standing still.

You're going to see a whole lot of new products, both software and hardware coming out.

In terms of acquisition, probably not.

And again, we always caveat that with, if there's a great opportunity, we may make a move but it's probably more unlikely.

We feel that with ARX, we've still got a lot of work to do obviously to get the momentum on that and we think that the economy will help that because from a competitive point of view we're really on our own which is great, with a great ROI.

And then we've got a lot of new functionality coming with the ADC business.

So, I don't think so, but where you'll see us being on the offensive is as we see that revenue, we'll be hiring.

But we're going to be doing it cautiously behind revenue.

Okay.

Perfect.

Thank you.

Thank you.

Our next question comes from Jeff Kvaal with Barclays Capital.

You may ask your question, sir.

Yes, thanks very much.

I wanted to revisit the product revenue question, if I could.

I was -- obviously the product revenue has turned a corner which is great.

It still seems to be below where one might like it to be or it was last year.

Do you think we have sustainably turned the corner of product revenue or should we be sort of in a flattish range over the next several quarters as far as you can see?

Yes, I don't want to behind behind the economy, but I think that's the major factor in the answer to that.

Competitive-wise, we're in great shape.

We are seeing -- we did see a different environment last quarter, right through the quarter, so if that continues you will see accelerated product revenue.

Okay.

Should we see -- we would like obviously to see the product revenue lead the service revenue.

Is that something that we can look forward to in the next couple quarters?

Well, that's the point I was making.

It does depend on the economy.

It really does.

I think from a -- where we sit within the data center as you hear more and more data center build-outs happening, you'll see us getting a very, very strong share in that space, but we're being cautious about saying that we've completely turned the corner.

I don't think in this environment that would be appropriate.

Okay and then just to clarify, the book-to-bill end product was above one is that right?

Correct, yes.

Okay.

Thank you.

Thank you.

Our next question comes from Alex Henderson with Miller Tabak.

You may ask your question.

Thank you.

Hey, guys, how you doing?

Nice to have you back, Alex.

It's a pleasure to be here.

Thank you.

I've got a couple of questions for you.

The first one.

I was wondering if we could just step through some of the metrics.

You talked about closure rates already so I'll leave that alone, but pricing conditions -- you mentioned win rates.

It sounds like those were at the upper end of your band.

Could you talk about deal sizes and in that context, what is the condition of the [Vadbar] channel at this point?

Have those guys kind of taken it on the chin a little bit in this downturn?

Are they still standing the way you would expect them to be?

Yes, in terms of deal size, I think it's remained pretty consistent with the last couple of quarters that we've seen.

It's interesting because I think we've been fairly aggressive with our sales team saying go out -- we're ready to -- as we talked about with our strong gross margin, look at doing some discounting and that's just not the environment out there and we see that in the very strong margins this quarter.

So, the pricing's been pretty stable.

Yes.

Some of the geographies been a bit tougher, in Asia for example, but not significantly.

And Alex, this is Mark Anderson.

We keep a real close eye on pricing and we're talking about variances here in the 1% range, right, so nothing significant.

With regards to the health of our bar channel, I think it's just like everything else in the other companies that you might follow.

There's been a real flight to quality and our customers are going to the highest quality partners that we have and so we're seeing the stronger partners get stronger and we're seeing the weaker ones probably get weaker, maybe take it on the chin.

But, without question, that aligns with how we're focusing our resources on the sales side.

We're spending a lot more time with the high quality, high value add partners that are going to give us the partnered leverage that we're looking for.

So, just to follow up that question, because I guess what I'm trying to really get at is looking at those metrics, is it reasonable to say that you're just stabilizing and that you really haven't seen any move to growth in the environment, that the conditions are not falling like they were last quarter, but they're not growing yet either?

Well, definitely stabilizing I think is the key word.

No question about that.

But having said that, our service business continues to grow and then most importantly, the product revenue for the first time in a while, actually, has grown sequentially.

The guidance that we've given as well would continue that process.

So, stabilizing, but obviously with slight upward trend.

The seasonality would certainly suggest sequentially up in both of those quarters.

Are you saying stabilization and then just normal seasonal or stabilization plus a little?

The problem is with the last 12 months, it's so difficult to call this.

I go back to -- I looked at a year ago in calendar Q4, our fiscal Q1, where we were going extremely well right up until the last two weeks in December and that's when spending just stopped and then we had that -- the March quarter when February it just stopped as well.

So it just -- it's not appropriate in my opinion yet to make any big weight calls here.

The second question on the conditions, how much of the improvement do you think is a function of firing up the sales force with the V-10's product or the software upgrade?

Has that gotten them to go out and give an excuse to go out and recall on people that they might not have been calling on otherwise?

Not so much.

Not last quarter.

It will have an effect more this quarter and the future quarters, but last quarter was really driven by the fact that our competitive position with the technology refresh of the systems combined competitive advantage -- V-10, definitely there's a lot of interest in it.

We're seeing a lot of downloads happening, things like the application templates, working with the sheer points and other solutions out there is definitely an area the sales force can go, they couldn't go before, but that's more this quarter and moving forward.

One last question then I'll (inaudible).

The VIPRION product, your strongest vertical was the service provider, was the VIPRION part of that or was that service provider within the enterprise piece of the service provider, if you will, i.e.

the corporation as opposed to their networks?

VIPRION has been a really strong catalyst within the service provider.

That's been what has been most popular, no question about that.

Service provider, large internet companies and then enterprise, in that order.

It's been sitting, our policy enforcement point within the service provider is all the mobile data is coming on basically making all the policies based on those applications.

That's been very popular.

Thank you.

Thank you.

Our next question comes from Brian Marshall with Broadpoint.

You may ask your question.

Hi.

Thanks guys.

A question with regards to the product revenues.

It looks like we saw that grow almost 2% sequentially.

I guess the question is, is there some pent-up demand, if you will, with regards to Park City being introduced in the quarter and would -- i.e.

barring any economic issues in the future, wouldn't you expect that to sort of reaccelerate here a little bit more than what we're talking about, given the fact that that is a pretty interesting new OS.

First of all, this has been said a few times, so just to be really clear, Park City, Version 10 didn't have a significant impact last quarter because it's a new operating system.

It's been tried and downloaded a lot, but that's not revenue and we do see that moving forward.

I think what we've seen is that data center builder had paused, starting to open up.

Not aggressively, but starting to open up and you're seeing a better environment.

That's been the main driver.

If I could just add.

Where we saw last quarter in Q2, customers not really knowing what budgets they had to spend in this past Q3 quarter, we saw that those budgets being defined an then our sales job becomes going in there and prioritizing our project over other projects and so that's a massive improvement in terms of the visibility and predictability that John mentioned earlier.

Okay.

And a question with regards to service gross margins.

Obviously continuing to impress once again and I think you mentioned that you're going to be adding some service heads.

Was wondering if you could give a little bit more granularity around there, maybe how many service heads you have today and what you're looking to add in the quarter?

Yes, I don't know the current we have, but what we watch mainly on that just is the customer satisfaction levels for the service that we provide and they've been excellent, right?

And you have to waive wanting to give that world class level of service against the hiring and we will add to that.

Historically, it's been about a third of the hiring and I said 25 to 50 is our plan for this quarter, so I think it will be in line with that.

Okay.

So it sounds like service margins are here to stay.

Well, I think in terms of the margins, at least in the short term they'll probably stay at this level, but we'll see over time.

And next -- as John mentioned, the next call we usually give some more directional guidance for the upcoming fiscal year and we'll talk about that then.

Okay.

Tamara, we'll take one more question and then we'll end the call.

Thank you, sir.

Our last question comes from Troy Jensen with Piper Jaffray.

You may ask your question.

All right.

Thanks for sneaking me in, guys.

Congrats on the nice quarter.

Couple quick questions.

First, either for John or Dan, I guess.

Microsoft has a substantial number of new products coming out in the next, call it year, year and-a-half here.

Just curious to know which Microsoft products is F5 more levered to?

Well, I'll try.

This is Dan.

Really, there are a lot of them.

So, whether it's the new server product, whether it's Wave-14, which is all sort of the Office product share point, Office communication server, the virtualization piece that they've got going on, the dynamic infrastructure efforts -- I don't know that I would pick one of them up and over any other one to really drive us.

It's going to be a pretty balanced effort as far as we're concerned for driving our revenue, which I think is a good approach, right, because we don't want to put all our chips in one basket.

Fair.

And then on Microsoft, guys, can you confirm whether or not you guys are designed into Microsoft's bing search service?

We're looking just to --

Yes, we are.

There's a whole broad range of elements of Microsoft's business that we're designed into.

Search definitely is one of them.

Okay.

Perfect.

And the last one, I'll give to the floor.

John I think you said on the call that Japan had kind of met your expectations.

I guess I'm just kind of going off memory here.

Weren't we expecting to see a better traction in Japan over the last two quarters given the refresh?

Yes, and we've been seeing that.

So, when the whole point about the comment in Japan was that -- last quarter was Japan's first fiscal quarter, so that is typically sequentially down and it was sequentially down, but it was above our forecast and our expectation.

Slightly, not significantly and then we would expect it to be up this quarter.

So, we're pretty happy with the way things have moved in Japan, both in terms of the take-up of the entry level, but also the fact we're adding more modules now at the low end, starting to slowly but surely drive bigger sales.

And (inaudible) have also added some direct touch there that's helping that as well to work with the partners.

Got it.

Keep up the good work, guys.

Okay.

Thanks a lot.

Thank you very much for joining us and please go be sure to call in if you have any follow-up questions.

Thank you.

We'll talk to you next time.

Thank you.

Thank you.

This does conclude today's conference.

You may disconnect at this time.