F5 Inc (FFIV) 2009 Q4 法說會逐字稿

Good afternoon, and welcome to the F5 Networks fourth 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.

Sir, you may begin.

Welcome all of you to our conference call for the fourth quarter and fiscal year 2009.

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

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

If you have any follow up questions after the call, please direct them to me, at 206-272-6571.

Copy of today's press release is available on our website.

In addition you can access an archived version of the live webcast from the events calendar page of our website through January 20, From 4:30 p.m.

today, until 5:00 Pacific time October 22, you can also listen to a telephone replay at 866-418-8383, or 203-369-0753.

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 on our SEC filings.

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

Before we begin the call I want to remind you that we are holding our 2009 analysts investor meeting in New York on November 3.

We hope you can join us.

If you are planning to attend the meeting, and have not registered, you can register on line www.f5.com/analyst-meeting or call Darlene Henderson at 206-272-6170.

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

Thank you, John.

Q4 was a strong finish to a very challenging year.

We saw continued strengthening in our core business and solid sequential revenue growth from the prior quarter.

We posted record quarterly revenue achieved a non-GAAP operating margin in the low 30s, and exceeded our GAAP and non-GAAP earnings guidance.

We were especially encouraged by the broad based nature of the momentum with all geographies delivering sequential growth and exceeding our internal targets and we were pleased to finish fiscal 2009 with annual revenue of $653 million up slightly from $650 million in fiscal 2008.

I also want to highlight during Q4, we won a major contract from a Fortune 50 company, this contract however did not contribute to our Q4 results.

Wort approximately $35 million, this represents the largest single order in the Company's history.

Products purchased under the contract amount to roughly one-half of the $35 million and will be shipped in stages during fiscal 2010.

The services portion of the contract will be added to deferred revenue at the time associated product shifts and recognized as revenue over five years.

Following my review of results for the fourth quarter and fiscal year 2009, I will provide guidance for Q1 and briefly discuss our planning assumptions for fiscal 2010.

For the fourth quarter of fiscal 2009, revenue of $175.1 million was above our target range of 160 million to $164 million.

Representing an increase of 11% from the prior quarter, and just over 2% from the fourth quarter a year ago.

Book to bill was greater than 1.

Q4 product revenue of $108.9 million represented 62% of total revenue.

Service revenue of $66.2 million, was 38%.

Revenue from our core application delivery networking business was $162.7 million, compared to $147.9 million in Q3 and represented 93% of total revenue, ARX revenue was $5.4 million, up from $5 million in the prior quarter and represented 3% of total revenue.

At $7.1 million, Fire Pass revenue was up from $5.4 million in Q3 and accounted for 4% of total revenue.

By geography, the Americas represented 56% of revenue, EMEA accounted for 22%, APAC 13%, and Japan, 9%.

By vertical, telco represented 24% of revenue during the quarter.

Technology including large Internet content providers was 19% and the financial sector accounted for 15%.

As expected, Q4 was a strong government quarter with US Federal at 9% of revenue, and total government 15%.

During Q4 we had two greater than 10% distributors AvNet Technologies which accounted for 13.8% of revenue, and Ingram Micro which accounted for 10.2%.

Continuing down the income statement gross margin in Q4 was 79.2%.

This includes $1.5 million, of stock based compensation.

Excluding stock based compensation, non-GAAP gross margin was 80%.

Operating expenses were $98.5 million, including $13.9 million of stock based compensation.

GAAP operating margin was 22.9%.

Excluding stock based compensation, our non-GAAP operating margins was 31.7%.

Our affective tax rate for the quarter was 32.2%.

Our non-GAAP effective tax rate was 29.9%.

GAAP net income for the quarter was $28.4 million, or $0.36 per diluted share above our guided range of $0.26 to $0.28.

Non-GAAP net income was $40 million, or $0.50 per diluted share, also above our guided range of $0.40 to $0.42.

For the full year, as previously mentioned, fiscal 2009 revenue was $653 million, up slightly from $650 million in fiscal 2008.

Product revenue of $406.5 million was 62% of total revenue and service revenue of $246.6 million was 38%.

GAAP net income for fiscal 2009 was $91.5 million, or $1.14 per diluted share.

Non-GAAP net income was $134.6 million or $1.68 per diluted share.

Turning to the balance sheet, in Q4 we generated $58.6 million in cash flow from operations.

Which contributed to cash and investments totaling $574.4 million at year end.

For all of fiscal 2009 cash flow from operations totaled $202 million.

DSO was 55 days.

Inventory at the end of the quarter was $13.8 million, deferred revenue increased 8% sequentially to $183.1 million.

Capital expenditures for the fourth quarter were $3.4 million, and depreciation and amortization expense was $6 million.

During the quarter we added just over 40 employees ending the year with approximately 1645 full time employees.

This compares to 1695 employees at the end of fiscal 2008.

In Q4 we repurchased 666,000 shares of our common stock for $24.1 million, for all of fiscal 2009 we repurchased 3.3 million shares.

Of the 200 million authorized by the Board for repurchase last October, approximately 113 million remains.

Moving onto the Q1 outlook during the past two quarters we experienced steady improvement in our core business.

Our pipeline has continued to strengthen, and close rates have improved.

While continuing to be cautious, we have taken these improvements in to account as we develop the following guidance.

We are targeting revenue in a range of 182 million to $187 million.

This guidance assumes book to bill equal to 1.

We expect overall gross margins of 78 to 79%, including approximately $1.5 million of stock based compensation expense.

Our operating expense targets are $105 million to $109 million, including approximately $15.5 million in stock comp expense.

Our effective tax rate for the quarter is expected to be 37.5%.

Excluding stock based compensation, our non-GAAP effective tax rate is expected to be 34%.

Our Q1 GAAP earnings target is $0.31 to $0.33 per share.

Our non-GAAP earnings target is $0.47 to $0.49 per share.

We expect to maintain our DSO in the mid 50-day range.

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

We are targeting an increase to headcount of 60 to 80 employees.

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

Now here is some general comments and guidelines related to our expectations for fiscal 2010.

With the economy in mind we believe it is prudent to remain somewhat cautious as we evaluate our growth prospects for the upcoming year.

Nevertheless, on the strength of our recent results, we feel confident of our opportunities for fiscal 2010 which John will discuss further in his comments.

As to revenue, we believe with the possible exception of Q2, which is our seasonally weakest quarter, we can grow revenue sequentially throughout the year.

We expect to see gross margins in a range of 78 to 80%.

We are targeting non-GAAP operating margins at or around 30%.

We expect stock based compensation expense to approximate Q1 levels until our next annual grant in August.

Capital expenditures are expected to be 4 million to $6 million per quarter and we expect our effective tax rates to average approximately 37.5% on a GAAP basis, and 34% on a non-GAAP basis.

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

Thanks Andy, and good afternoon everyone.

I will take a few comments to cover F5 performance in fiscal 2009.

Talk in more detail about the Q4 results and then comment on our outlook and the opportunities we see going into fiscal 2010.

Fiscal 2009 was clearly a challenging year given the problems in the global economy.

In the first half of fiscal 2009 we saw IT organization, moving quickly to reduce IT spending budgets.

Delay projects and slow down data center builds.

As we moved in to the second half of the fiscal year we started to see some improvement and stabilization in spending patterns combined with a more predictable forecasting environment and higher deal close rates.

We continue to see this improvement in spending patterns in Q4 and I will talk about that in a moment.

In spite of the challenging conditions in fiscal 2009 we made significant progress and the F5 team should be proud of our performance and achievements.

We moved quickly in January to reduce our operating expense run rate to align with the new business conditions and to ensure we continue to deliver profitability at world class operating margin levels, we introduced array of best of breed products throughout the year and completed refresh of our entire product line as well as delivering the most significant upgrade to our TMOS operating system since 2004 with TMOS version 10.

We gained market share in our core ADC business and grew our ARX file virtualization sequentially each quarter for the year.

We ended fiscal 2009 with a stellar balance sheet with approximately $570 million in cash and investments having repurchased approximately $87 million of common stock, over the course of fiscal 2009.

When I reflect back on our fiscal 2009 achievements I am most pleased with our performance in Q4.

From a geographic perspective the start of the quarter was North America especially when you include the large multimillion dollar project win which was the largest of our single order.

As Andy mentioned we started to ship products for this project in this coming quarter.

Having said that the success in Q4 was very broad based with all major geographic regions exceeding our internal targets and delivering sequential revenue growth.

It was also very encouraging to see sequential revenue growth in our core ADC business and we expect that to continue in Q1.

Cash flow from operations about $58 million.

Non-GAAP operating margins just below 32%.

Also exceed our internal targets.

We also saw solid results with our remote access products as well as continued sequential growth with the ARX products.

Our services business delivered yet another solid quarter completing a tremendous year.

Deferred revenue continues to grow to record levels and the customer satisfaction metrics remain world class.

We enter fiscal 2010 in a very strong competitive position.

As I mentioned earlier we completely refreshed our product line during last year and the new products have been well accepted in the marketplace.

They adoption of TMOS version 10 is progressing well and should prove to be a significant business driver this coming year.

Our average order size is increasing, driven by Vitrean and other high end ADC and ARX products.

I am very excited about product road map and I'm confident we will expand and enhance our technology leadership position across our entire product portfolio in 2010.

We will present this product road map in detail at our upcoming analyst investor meeting in early November.

I will not go in to anymore detail here.

As far as the outlook is concerned Andy provided a projected revenue range for Q1.

As well as some of the high level expectations for the fiscal year.

Obviously given the experience of last year, and remaining uncertainty over the global economic recovery, I believe this is appropriate to remain cautious as we move forward.

That being said, I'm very excited about the future of F5 as we enter fiscal 2010 compare to run rates are extremely high and the pipeline of business is very strong.

I believe our products are right in the sweet spot of current and future data center architecture trends.

F5 products occupy a very strategic control point in the data center, as organizations drive to reduce cost by consolidating data centers and using virtualization technologies.

I would like to take this opportunity to thank the entire F5 team and our partners for their efforts in 2009 and I look forward to the continued support in 2010.

With that we will now pass the call over for Q&A.

(Operator Instructions) Our first question comes from Mark Sue with RBC Capital Markets, sir, your line is open.

John, the reacceleration in product revenues, any thoughts if you could kind of parse that, with recognizing its broad base the stimulation from the TMOS version 10 or is there a particular vertical such as telco that's really catching up?

Little more granular about that would be great.

I mean it really was broad based.

So version 10 definitely a factor, although it will become more a factor as we get through this year.

Not as significant but will become significant.

The telco vessel with mobile data and Vitreon is definitely a great opportunity and then the product refresh as well.

We've just been seeing a difference in spending patterns as well.

And Andy, $187 million, that's the highest revenue base in the Company's history, do you feel you are adding enough head count behind this revenue growth and that 30 % operating margins is something steady that we can expect throughout 2010?

As I said in my comments, at or around 30% is kind of as we see it today.

Yes, I do believe with adding 60 to 80 heads this quarter, obviously we talk a lot about we constantly watch our revenue on a very granular basis and if the opportunity presents itself we will up that accordingly.

Thank you, gentlemen and good luck.

Next question comes from Ittai with Oppenheimer .

Guys congratulations on a phenomenal quarter.

John, and Andy, two questions that are really lumped together.

Can you tell of the demand that you are seeing right now how much of it is real normalized demand as you called it versus catch up in spending, people that haven't invested in the last two, three quarters that need to spend those dollars before they lose them?

And so because I would like to really get a much better feel as to how much of this is really recurring normalized versus possibly, hopefully not, but possibly going away within a quarter or two once you are fully normalized?

Second Andy, with regards to your March comments, with respect with the exception of the last year, history shows your March is actually up sequentially.

And never down.

Why should we believe that down march this time around?

Typically in March you seen book to bill less than 1.

That has been historical the case for a few years which has helped the sequential growth.

We, from a booking perspective we have seen it somewhat seen seasonality in the margin and we wouldn't expect that to change.

I think that's the comment.

We didn't say it would be down, we said possibly.

That's the other comment on that.

With that being the first question, it's a very good question, we've looked to that a lot how much suppressed demand was over the last two or three quarters.

Maybe some of that we don't think it was a big factor, which is obviously why with our guidance we are guiding for continual sequential growth and specifically because of the large project, Andy also indicated that assumes a book to bill ratio of 1.

So clearly we think the environment is still going to be good.

I'm going to caveat all that with a fact that clearly the economic situation is still tenuous, so we reserve the right if there is major change in the economy that things could change.

Where we sit today we actually feel pretty positive about momentum.

Good luck.

Next question comes from Brian Marshall with Broadpoint AmTech.

Thanks, wondering how much inherent leverage is built up in the ARX line?

It looks like that business grew roughly 51% year-over-year, can you comment on the type of growth that you see over the next couple of quarters?

We don't comment specifically about product on the growth projection, having said that one of the major goals we have this year is to get reasonably material growth.

Within ARX.

We are investing in it.

So Mark Anderson's team is recruiting as we speak for more stories based on orderly salespeople and presales, we will be -- we will be increasing services as the base grows we are also investing in development as well.

We see it's a very important goal this year.

Safe to assume as a percent of total sales that that will continue to be increasing.

The percentage growth definitely has more opportunity because it's a lot of small numbers.

We feel good about ADC business, but probably yes if we execute appropriately.

Final question with regards to the financial services sector, looks like that obviously was down about 21% sequentially.

Was wondering if you could comment on did some of your larger customers go away or is this just spending slow down across broad base would you expect that to rebound here?

It's interesting, last year it was down as well.

I don't know if that's a trend or not.

Nothing significant.

We would definitely expect it to be up in the December quarter.

Our next question comes from Troy Jensen with Piper Jaffray.

Congrats on the great quarter, guys.

Thank you.

So can we spend a little time on this big deal that you announced.

$35 million, half of its product.

For a sense of magnitude prior to this deal what was your previously largest deal?

I don't know off the top of my head what it was.

But it was less than ten.

Less than ten.

Just on that subject, because I think it's important to get this, is if you look at the last four years and you look at within that fiscal year, we've had several times where customers have given us double digit product revenue within that year, in fact, last year with several customers where we had double digit revenue.

Not in one order, but double digit revenue.

We don't think it's -- we think it's part of normal business obviously a pretty high one.

So, John, is there is there something abnormal about this deal or is there other opportunities like this out there for you?

That was big consolidation.

So from that perspective, if you see big consolidations, we would see another opportunity.

The last thing I'm going to leave you with is that we got a legion of deals this size, it's not like that.

But we have (inaudible) and my introduction.

The deal and project size is increasing, so it wasn't the only multimillion dollars deals we got last quarter and we would expect to see some over the course of the year.

Last one is was it in the financial services vertical?

Yes, it was.

You guys congratulations to Andy on the birth of your new daughter.

Thank you very much.

Keep up the good works guys.

All right.

Your next question comes from Brian White, with Ticonderoga, your line is open, sir.

If we could look in to 2010, give some color on margins and sales, can we expect the product revenue to outperform the service revenue in 2010?

Well, definitely our goal to reaccelerate the product revenue, I specifically haven't looked at comparative images.

But I think we will drive product revenue and then we'll see service follow suit with it.

The goal -- I mentioned ARX is one of the key goals for this year.

Top financial goal is revenue growth.

We feel really good about the management of the operating margins and the endings, we feel good about product gross margins and service gross margins and we feel good about the service business.

Overreaching goal is revenue growth.

In there our goal is to get market share in ADC, material growth I mentioned at ARX and sequential growth in services.

Okay.

John, maybe just give us a little color on the customer mood, it's definitely changed in the last few months you talked to a lot of customers around the world, maybe just give us color on what your customers are saying right now?

Yes.

I mentioned this and one of two of the conferences we attended during the quarter that when we have been talking to the some of the fortune 50 customers for example you could definitely see a scenario changing where they were saying we know the plans to restart up data center builds, staffing of data center, there definitely was more optimism, but again as I said when I was describing that, I think the other side of the coin is that if things turn bad in the economy customers are very very good now at causing the (inaudible) very quickly.

So you have to balance the two things.

Okay.

Great job.

Thank you.

Our next question comes from Jason Ader with William Blair Thank you.

I have two questions, first, 9% of revenue from federal, is that a record?

I don't believe it is Jason.

I think we've done 10%.

Obviously record in terms of absolute dollars given the high revenue for the quarter.

As a percentage, it's not the highest you've ever done.

Nope.

Second question, if you look at some of the market researchers like Gartner and IDC they seem to be forecasting 10% type growth for the space over the next three years, five years, it seems somewhat muted relative to the history of the space and relative to your revenue growth until recently, I'm guessing you don't agree with that type of forecast, but what do you think they are missing and what do you think the real growth rate of the application delivery controller space is?

Jason, this is Dan, I think one of the things that drill down on is say within a forecast like Gartner for example, in the ADC space they have several different categories of products, and when you look at the advanced application delivery controller segment that one is actually I think for 2010 they're saying 4% annual growth then it goes to 29% the next year and then 20% after that.

We can debate over the timing of those numbers but I think the trend that's important to pull out of there is that the advanced ADC thing is growing way faster than other segments of the ADC business.

And that I certainly concur with.

In terms of the other -- all the analysts in general I think one of the challenges they run in to is that the forecasts are done largely by looking in the rearview mirror.

And one of the things that we struggle with with them is explaining all the new spaces where our products fit and the new solutions that we can drive.

That's very difficult for them to model.

We look at the market slightly differently as well.

If you look at customer base, we are in the 55% plus range if the fortune 500, that means we are not in 45% of the fortune 500.

We see an opportunity.

I mentioned the multimillion dollar account, there is still a relatively small number of accounts that do that.

Mobile data growth and telco is clearly going to be a big driver for us, Internet companies, social networking and things like that.

Data center consolidation, Microsoft and Oracle apps, we feel pretty good about market opportunity.

Okay.

Final thing is you answered the question before about cash up spending versus real normalized business.

John, you been in the business a while, you've seen a lot of talk and heard a lot of talk about data centers and consolidations, does it feel like we are at the cusp of the inflection point here where there is just a number things coming together, obviously assuming the economy is healthy, but does it feel like we are kind of -- we are at that cusp right now?

I wouldn't presume to know that to be perfectly frank with you.

We seem to be a reasonable bellwether.

I wouldn't presume to know that.

I think we need some more quarters before we start calling that out.

I'm talking about the general market not about business, when we look at our business we look at the pipeline we look at where we say competitive.

To make a broader statement I think wouldn't be wise right now.

Our next question comes from Ryan Hutchinson with Lazard.

Good afternoon, guys.

On the guidance front, has your methodology changed at all in terms of the close rate assumptions, I know you touched on it a little bit in the prepared remarks but just wanted a little more color there.

In my comments I talked about strengthening pipeline, improving close rates, we didn't necessarily take in to new close rate level by any means because we are keeping the overall just uncertainty around the economy in mind.

But we did take them up.

Then as it relates to one of your competitors out there on the storage front in their new relationship with Dell, does that change any of the dynamics in terms of your channel?

We haven't seen -- our business with Dell was very strong last quarter, we expect that to continue.

Great.

Then finally on the taxes I know you gave it for next quarter but in terms of full year on both a non-GAAP and adjusted basis as well.

So GAAP is 37.5%, and 34% for non-GAAP.

For the full year?

Yes.

It's worth noting just that obviously assumes the R&D tax credit when that comes up it tha it doesn't get approved.

Every year there is kind of this give and take on whether or not they are going to approve that.

They've approved it 13 years in a row albeit late usually.

So that will affect the rate if that happens to be voted in again by congress.

Perfect, thanks, guys.

Our next question is from Alex Henderson with Miller Tabak.

How are you doing?

Good.

I bet you are geez, these numbers.

Golly.

I missed the guidance on the full year operating expense line for -- that you gave the GAAP number and you said 15.5 subtracting stock comp I missed the operating expense line.

Are you saying for the year or the quarter?

Sorry for the quarter.

For the quarter, our operating expense targets was $105 million to $109 million.

That includes the 15.5.

105 to 109?

Yes.

Thanks.

So clearly you had a extremely robust quarter up 10% sequentially, the obvious question here is, is this a function of share gains or is this a indication of strength?

I was wondering if you could just talk to a couple of the metrics there relative to what kind of win rates were you seeing relative to competitive bids Any change in that that would be indication of an acceleration in share pickup or anything of that ilk?

I would have to say, win rate was extremely high, but to say share gains -- yes, we need to wait to see results et cetera, win rates are really high, Mark, do you want to comment on that.

Against our traditional competitors, our win rates actually went up last quarter.

We said in the past they've been in the low 90s.

We feel really good about our competitive position and there is no limitation there for us.

Could you talk a little bit about the linearity in the quarter our field check had shown that most of the VARs were hitting the numbers for the full quarter by the second week of September which obviously is pretty (expletive) robust and up sequentially from July to August which is unusual.

Is that consistent with what you were hearing?

Our linearity, actually if we set aside the large deal I talked about was very normal for us that 50% in the third month kind of a quarter.

Looking at the conditions as you're looking out in to the upcoming quarter you obviously saw in a better close rates and faster faster close rates, are you expecting the faster transaction closure rate in the upcoming quarter.

I know you said that you are not at the same level of closure rates as you had here in the most recent quarter, although it was somewhat up, but what about the length of time to close deals?

I don't think that will change much either.

We are assuming slightly lower close rates than last quarter.

But higher than the ones we used for last quarter.

Slightly lower but in terms of the actual time, I don't think there will be much change, I mean there may be, but it's no reason for us to think it will be different.

Great.

I'll cede the floor, Thanks.

Our next question comes from Jeff Kvaal with Barclays.

Thanks very much.

My first question Andy is for you, what do you mean by assuming book bill is equal to or greater than one for the guidance for December?

I said it assumes equal to one.

Essentially we are assuming that we will book as much business that translates to what we bill or becomes revenue.

Essentially it doesn't count on bringing down backlog in order to achieve the number.

Okay.

All right.

Then book to bill is better than one then you would bill backlog for the potentially seasonally down or not seasonally down March quarter.

Yes.

That makes sense.

Secondly, I was wondering the services gross margins obviously have been very robust and pick up 500 basis points or whatever over the past year.

Do you think that is a sustainable level for them or should we expect some degradation?

This is Julian, no, we are looking at both continued revenue growth and keeping the gross margins at that level.

We really monitor the delivery statistics and customer stat has been the key metric for us in terms of cost and we are managing to stay in the right place and investing at the same time.

Okay.

Fantastic.

Thanks very much.

Min Park with Goldman Sachs, your line is open.

Just a couple of quick questions, please.

First could you just give us a sense of how much of the pick up in revenue stems from new customer adds versus increasing penetration of existing accounts?

Actually if you break it down by percentage for the quarter, business broke down from existing customers about 63%.

New business was 37.

How has that changed quarter to quarter?

It's a little bit late new business, it's pretty close to the norm.

No significant change.

Okay.

Then also could you just give us a update on the pricing environment and I know last quarter you mentioned might have lost a deal or two from aggressive pricing from some of your competitors.

Did you see that again this quarter?

Actually pricing just again really wasn't an issue for us and I think you see that reflected in the gross margin.

Where we did see it frankly was in very small, very low end, low balancing type deals that we actually weren't really that aggressive after.

But for our the bulk of our deals, no pricing issues at all.

Great.

Then just lastly, I was just wondering if you could give us your thoughts on if you saw any difference in the pick up of demand from your various customer segments, whether service provider Internet providers or (inaudible) price customers.

Did any of it snap back any better this quarter than the others?

Well, I mean as we say the finance desk was a little bit down, we don't think that's meaningful, we think it's going to be up this quarter.

Obviously federal was good because it was the year end.

But generally there was no big changes.

Thank you very much.

Richard Sherman with MKM Partners your line is open.

Good afternoon, guys.

A couple of questions here, first on the growth rate on Acopia, you're talking about continuing to grow acopia a a key strategic priority in fiscal year '10, could you maybe first talk about maybe the expansion of the reseller channel how many resellers you now have on fully trained on Acopia and what's the growth rate you are looking for.

Are we talking of doubling from the quarterly run rate we've seen the last couple of quarters?

First of all on Acopia or ARX products as we call it the resale of channel we put up a bunch of resellers, some sell EMC< some also sell the F5 core product.

We are obviously very focused on working with some of the larger system type companies, the Seattle type companies, that sales through as well and that's a big opportunity.

We are still doing good partnering, as far as the reseller but with data domain as well.

So we see that as important.

But having said all that, right now the reason we are adding salespeople is we are touching most of the ARX wins.

I think that continues in the short-term.

I don't want to spend a lot of focus like I say with the server vendors.

John, about how -- can you give us an idea about how big that direct touch sales team now is for ARX?

It's pretty small.

It's about 30 people.

Okay.

Very good.

Maybe in terms of the core platform, big IP do you envision a opportunity here to bring more third party security software on board that platform as way of you talk about being a control point in the data center, do you think you are going to be a platform on which third party software vendors will look to port their products particularly on the security side and what's the implications for the gross margin line.

This is Karl.

We are always looking at that and looking who we can partner with.

We did release a couple of years ago our MSN module to -- partner with different companies.

We are looking at a number of different ways we can do that with our ASM module today.

I expect that to continue.

I talked about in the past about to be able to host third party applications, that's a long-term goal on the road map.

For now it's really focusing on partnerships and using eye control and (inaudible).

Thanks Karl.

[Jeff Rupert] with Wells Fargo Securities.

Great quarter.

Couple of questions if I may.

First just in respect to the large deal can you give us a sense of the product suite the customer is buying, is it Vitreon or ARX or is it more of a complete mix, any help you can give there?

This is Mark Anderson.

So it was mostly 8900s running version ten that we did consolidating about 700 boxes down to just over 300 boxes in a way that provided a compelling ROI to the customer and it's clearly something that was compelling enough to make the move.

Anymore detail than that.

We also consolidated some competitor boxes as well.

Yes, there was.

Okay.

Moving onto the service business, is growth going to be closely tied to product sales at this point or do you feel that you still have good opportunities to upgrade the base to premium and premium plus service contracts?

It's always got a relationship with product sales.

That's certainly one element to it.

At the same time we are expanding our services on operate our client services of their purchasing and we're looking at some geographic expansion both in terms of the renewal business and services that we offer.

Is it fair to think that services grow sequentially throughout fiscal '10?

This is John here.

I'll answer that.

That's definitely the goal.

Could you touch on the level of business you saw from HP this quarter and perhaps gives us a sense as to whether or not Cisco's UCF effort has pushed customers and business your way and perhaps positively influenced your sales?

Yes.

I mean I think that general catalyst has been great for us, no question about it.

We wouldn't go in to specific details of the partner business.

We've always done a lot with EDS and we continue to do business with them.

HP is a key partner.

As are Dell and other IBM actually and obviously with competitive nature again, Cisco that definitely helps us.

Just one clarification before I cede the floor did you say that book to bill was greater than 1 excluding the big deal?

We didn't say that.

Okay.

Thanks.

Excuse me we didn't take any revenue on the big deal.

Right.

Brian Freed with Morgan Keegan, your line is open.

--operating cash flows were $898 million, an increase of 27% from the same period--.

Brian Freed, your line is open.

--for the same period free cash flows increased--.

Rohit Chopra with Wedbush Securities.

Can you hear me?

I just want to go back to tha large deal, was there a systems integrator involved?

It's not just you I'm assuming.

In any large deal like this we don't talk about the customer name, not the partner either.

Yes, the short answer.

Thank you.

Then a couple other questions.

I think you guys brought back Dean Darwin a couple quarters ago, we changed some compensation structure for top tier partners, I was wondering if that compensation change has driven those top tier partners to contribute a little bit more or is there any way to measure that.

I'm sure you guys are doing that internally, but is that helping.

That has been helping pretty significantly.

I think it was more than a couple of quarters now.

We actually took over a worldwide role a couple of quarters ago.

I'm sure he's listening to the call and he is doing a great job.

Then John you mentioned last quarter there were some deal slippage I guess, thinking back it was the UK I think you mentioned were you able to capture some of those deals and maybe you can just add a little bit of color on what is happening in Europe?

You're absolutely correct.

That's what we said last quarter.

I don't know if you know Mark, there were slip deals.

I don't know if they were closed or not to be honest.

I think some of them were and some of them continue to push.

Generally EMEA had a very strong quarter.

EMEA, we were very happy with EMEA it's usually seasonally weak.

To have the results they had it was excellent.

Specifically, can't comment on the deals.

Okay.

Thanks.

That's it.

Bill Choi with Jefferies your line is open.

Thanks.

Just couple of additional questions on the big deal.

What are you anticipating to be the rollout schedule over the fiscal 2010, is that going to be front end loaded back half on the product side?

First of all this sort of thing is customer driven.

Obviously it can change so we don't want to make any statements.

We're pretty confident we are going to be shipping this coming quarter and then we will just leave it to that.

Okay.

When you talked about your deal sizes increasing overall besides these big singular deals, I think it was around 150,000 to be a past average number, can you give us an update to what that number is now?

Yes.

You know what Bill, we actually have changed how we track that metric, just because what we've always historically done is accumulated individual orders if we felt it was all part of one big deal.

We've changed that metric to our average order size.

We've kind of gotten away from that 150,000.

It's on an average order basis we are seeing it over the last four quarters it's definitely trended up but the numbers closer to like 67,000 on an order basis.

Okay.

Just talking about big area of potential spend, cloud computing is certainly a big topic and some of these cloud providers are quite opaque about the actual hardware they use but they are talking increasingly about load balancing services and various things, can you share your thoughts about your uptake in these kinds of cloud providers and what your position might be in these new buildouts?

So we view the cloud trend as something that's very very positive for us.

If you go and look at say for example Gartners magic quadrant for cloud providers you would find nine out of ten of the providers in there are building clouds out using a Five products.

So we are very pleased with that.

We also think when it comes to the enterprise as they are adopting tools like VMware, as John said we're a strategic control point in the data center and we think we are very very well positioned to help people move workloads around not only within their own data centers but also out to third parties ultimately, so we think those two trends tie together.

And we're the (inaudible).

We are going to talk a lot about that at the analyst investor meeting.

Thank you.

We are going the cut that off there, thank you all for joining us.

We hope you can all join us for the analyst meeting in New York on November 3.

Look forward to seeing you then.

Thank you, sir.

Thank you.