F5 Inc (FFIV) 2010 Q1 法說會逐字稿

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

At this time, all parties will be on listen-only until the question-and-answer portion.

Also, today's call is being recorded.

If anyone does have objections, please disconnect at this time.

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

John Eldridge, Director of Investor Relations.

Thank you.

Sir, you may begin.

Thank you, Brian, and welcome, all of you, to our conference call for the first quarter of fiscal 2010.

Speakers on today's call are John McAdam, President and CEO, and Andy Reinland, Senior VP and Chief Finance 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 haven't seen a copy of today's press release, it is available on our website at 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In addition, you can access an archived version of today's live webcast on the events calendar page of our website through April 21.

From 4:30 pm today until midnight pacific time January 21, you can also listen to the telephone replay at 800-217-1705, 402-220-3900.

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 those 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.

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

Thank you, John.

Q1 of fiscal 2010 was a quarter of solid growth for F5.

Revenue of $191.2 million was up 9% sequentially from $175.1 million in the prior quarter, and above our guided range of $182 million to $187 million.

GAAP EPS of $0.36 per diluted share was above our guided range of $0.31 to $0.33.

Excluding stock-based compensation expense, non-GAAP EPS of $0.52 per diluted share was also above our guidance of $0.47 to $0.49.

Product revenue of $119.2 million grew 9% sequentially, and represented 62% of total revenue.

Service revenue of $71.9 million also grew 9% sequentially, and accounted for 38%.

Book-to-bill for the quarter was greater than one.

On a regional basis, the Americas represented 58% of total revenue.

EMEA accounted for 24%, APAC, 11%, and Japan, 6%.

Revenue from our core application delivery networking business was $178.7 million or 93% of total revenue.

Revenue of $5.7 million from our ARX file virtualization products was up from $5.4 million in the prior quarter, and accounted for 3% of total revenue.

FirePass revenue of $6.8 million declined slightly from Q4, and represented 4% of total revenue.

During Q1, the financial vertical was 31% of revenue, driven in part by shipping a significant portion of the large financial deal, one in Q4.

Telco accounted for 21%, all government was 12%, including 7% for US Federal.

At 12% of revenue, the technology vertical is lower than normal.

It is worth noting that technology bookings were, in fact, up from the prior quarter, and exceeded our internal forecast.

The decrease in the number reported is a reflection of a mix shift in our backlog.

As we shift out a significant portion of our large financial deal from beginning backlog, we saw a sizable increase in technology orders reflected in our ending backlog.

As I already mentioned, book-to-bill for Q1 was greater than one, resulting in backlog increasing over the prior quarter.

During Q1, we had two greater than 10% distributors, Tech Data, which accounted for 12.5% of revenue, and Avnet, which represented 11.6%.

Moving down the income statement, GAAP gross margin in Q1 was 79.5%.

Excluding approximately $1.6 million of stock-based compensation expense, non-GAAP gross margin was 80.4%.

GAAP operating expenses of $108.3 million were within our target range of $105 million to $109 million.

Excluding $15.5 million of stock-based compensation expense, non-GAAP operating expenses were $92.8 million.

GAAP operating margin was 22.9%.

Non-GAAP operating margin, which excludes stock-based compensation expense, was 31.8%.

Our GAAP effective tax rate was 35.5%.

Excluding stock-based compensation, our non-GAAP effective tax rate was 33.7%.

On the balance sheet, we ended the quarter with $647 million in cash and investments.

Cash flow from operations was $74 million.

During the quarter, we repurchased approximately 309,000 shares of our common stock at an average price of $48.47 per share, for a total of approximately $15 million.

DSO ended the period at 51 days.

Inventories at quarter end were $14.8 million.

Deferred revenue increased 15% sequentially to $211.4 million.

Capital expenditures for the quarter were $3.6 million, and depreciation and amortization expense was $6 million.

We ended the quarter with approximately 1,740 employees, an increase of 95 from the prior quarter.

Moving on to the Q2 outlook, in forming our view on revenue guidance, we recognize that Q2 is typically our seasonally softest quarter.

However, we also see continued strength in our key drivers and a solid pipeline of business.

These factors give us confidence that we will continue to see sequential revenue growth through the remainder of fiscal 2010.

With this in mind, we're targeting Q2 revenue in the range of $195 million to $200 million.

This guidance assumes book-to-bill for the quarter will be equal to one.

We expect GAAP gross margin in the 79% to 80% range, including approximately $1.5 million of stock-based compensation expense.

We anticipate GAAP operating expenses in the range of $110 million to $114 million.

This includes approximately $15.5 million of stock-based compensation expense.

Our GAAP EPS target is $0.36 to $0.38 per diluted share.

Excluding stock compensation, our non-GAAP EPS target is $0.52 to $0.54 per diluted share.

We are forecasting an effective tax rate of 37%.

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

We plan to increase our headcount by 60 to 80 employees in the current quarter.

We estimate our DSO will be in the low 50s.

We expect inventory levels within a range of $15 million to $17 million.

And we believe our cash flow from operations will be in excess of $55 million.

This reflects the impact of two large tax payments we make during Q2 per our normal tax payment schedule.

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

Thanks, Andy.

And good afternoon, everyone.

I was very pleased with our performance in our first quarter of fiscal year 2010.

The sales and revenue momentum that we experienced in the second half of fiscal 2009 continued into Q1.

All our major regions except for Japan met or exceeded our internal forecast.

Japan sales were slightly below our internal expectations, but we do expect to see both sequential and year-over-year growth in Japan in this coming quarter.

Business in both the Americas and Asia Pacific were solid in Q1.

And the star of the quarter was the EMEA region, where we saw strong revenue and sales bookings growth, driven by several large deals above $1 million in value.

Once again, our services business produced stellar results with solid sequential growth and a significant increase in deferred revenue.

From a product perspective, our ADC business continued to be the main driver of our overall growth.

With the product refresh that we completed over the last 12 months, and the major software upgrade of TMOS version 10, we believe that our competitive position is the strongest it has ever been.

And we intend to continue that momentum in technology leadership during fiscal 2010, with a significant array of new product introductions.

Our ARX business was up slightly on a sequential basis.

However, we believe we can improve on that performance given the extraordinary ROI that ARX delivers to our customers.

We issued a press release a few weeks ago highlighting a couple of senior management hires for the ARX team, and we have also increased our headcount in the ARX sales, marketing services, and product development.

The new ARX 2000 system is now shipping.

And we expect the 2000 to become the most popular ARX product.

As I mentioned earlier, we'll be introducing a wide range of new products and software functionality during fiscal 2010.

We have started shipping TMOS version 10.1, known internally as our equinox release, which brings a wide range of new functionality and performance to the ADC line of products.

TMOS version 10.1 supports our new PB200 performance blades for VIPRION, effectively doubling the performance of the VIPRION product.

VIPRION can now sustain up to 72 Gigabits per second throughput, and 6.4 million layer 7 requests per second, far ahead of any other ADC product in the market.

We have already taken orders and shipped systems with the new VIPRION PB200 blades.

The equinox TMOS version 10.1 release includes approximately 118 new features, most of which were driven by customer requests.

Three important areas of new functionality include an access policy management module, a major increase in the performance of our WAN optimization module, and a new Edgeway gateway solution.

The BIG-IP access policy manager, APM, is fully integrated into TMOS, and inter-operates with the other BIG-IP modules.

APM drives identity and access services into the network.

APM allows customers to consolidate network infrastructure, scale web access management, and provide better security for applications.

It gives customers a (inaudible) to use application layer information in network traffic to drive dynamic access control policies through our visual policy editor, while performing at network speeds.

With the TMOS version 10.1 WAN optimization module, we now deliver the highest performing WAN optimization controller in the market for data center to data center replications, with performance above 10 Gigabits per second.

As well as improving WAN replication time by eight to ten times, this new module also includes unique policy-based SSL encryption.

The BIG-IP version 10.1 Edge gateway unifies and optimizes access to the data center.

It combines next generation SSL VPN remote access, application acceleration, security and high availability functions on our TMOS platform.

It also includes a BIG-IP Edge remote access client to provide optimized access for mobile users and remote offices.

Our Edge gateway is part of our broader application delivery controller division, and is the first step in converging security with acceleration on our TMOS platform.

TMOS per BIG-IP Edge gateway to provide up to ten times the performance of competitive solutions at half the price, significantly increasing our technology leadership.

From a platform perspective, you should also expect to see several new products being introduced in fiscal 2010, including a (inaudible) range of systems, and the turbo appliances we referred to at our analyst investor conference last November.

At the conference, Karl talked in some detail about the improved data center scalability and manageability to be provided by unique virtual clustered multi-processing architecture V-CMP.

You should also expect to see significant announcements regarding virtualizations of our product during the year, starting in a relatively short time.

As far as the outlook is concerned, I feel optimistic about our business prospects for the remainder of fiscal 2010.

Obviously we remain cautious given the experiences of the first half of fiscal 2009, where we saw pauses in spending by our customers.

Having said that, we feel very positive about our market opportunities and our competitive leadership.

Andy indicated that we now expect to deliver sequential revenue growth in each quarter of fiscal 2010.

Our pipeline for future business is very strong.

Market drivers for our business continue to increase at significant rates, including the accelerating growth in storage requirement, data center consolidation projects, and the significant growth in mobile data and mobile applications.

The F5 solutions occupy strategic control points across global data centers, and we are extremely well positioned to take advantage of these market drivers.

In conclusion, I would like to thank the entire F5 team, our partners and our customers, for the support last quarter, and will now hand the call over for Q&A.

(Operator Instructions).

Our first question comes from Brian White.

Please state your company name.

Ticonderoga.

Good afternoon.

Wondering if you could talk a little bit about the $35 million deal you announced on the last call.

I think half of that was going to be products, and what percent of that product was actually recognized in the quarter?

In the current quarter, for Q1, so yes, you're correct, about half of it was product.

We shipped about two thirds of that roughly in the current quarter, so that became revenue in the current quarter.

But I do want to highlight that our book-to-bill still was greater than one for the quarter.

So, our backlog did sequentially go up.

Okay, and as we look forward, obviously from a financial set, a phenomenal quarter based on that recognition of revenue, as we look forward, what areas in terms of verticals are you seeing the most activity right now?

The issue here is we need to talk about the backlog business we have, as well.

If you look at Q2 in particular, you are going to see telco being pretty strong, technology being pretty strong, and finance being strong.

And interestingly enough, if you look at the bookings that we did last quarter, not just the revenue, it was pretty much normal.

In the 20% range for the three big verticals.

Okay, thank you.

Next question come Ittai Kidron.

Your line is open.

Thank you, and, guys, congratulations on a good quarter.

Andy, wanted to drill again into this large deal.

You mentioned that you've recognized significant portion of that large deal in the quarter.

Can you tell us if you break it down, if you look at your core business, is it fair to say that you recognize more than you expected of that deal.

And how did your core business outside of that large deal really performed?

And with regards to the remaining one third of product that you haven't shipped, is all of that coming in the March quarter?

This is John, actually.

In terms of expectations, obviously shipments in the large projects were very customer driven.

So we follow the customers, so we had no major expectations.

Obviously we did say we expected to ship throughout the fiscal year.

So, no major expectations.

In terms of the rest of the business, it was obviously very solid given the book-to-bill issue going up.

Yes, but John, I'm trying to drill in a little bit deeper as to where was the upside relative to your own expectations.

Was it from the deal?

Or was it from the rest of your business?

Oh, it was from the rest of the business.

No question.

We knew about the deal going into the quarter.

So, our technology business was very strong, and Andy mentioned, we also -- yes, it was across -- apart from Japan as I mentioned, it was across geographies and across the verticals.

And is the remaining product revenue on that transaction coming in this March quarter, and from this point going forward, it is going to be just service--?

We would expect to ship in this quarter, but again, we'll do it by customer direction.

Thank you.

Good luck.

Thanks.

Next question from Jason Ader.

Please state your company name.

Thanks.

William Blair.

Guys, I wanted to ask you about ARX.

Can you give us a sense of, over the last year or so, maybe how you position the product, and how you've learned from maybe some of the challenges you've had.

And what's really the plan going forward in terms of trying to boost the revenues to get to the double digit type -- .

Absolutely.

I mean, doing it, in terms of over the year, of course, there was a little (inaudible)-- at the beginning of fiscal 2009, it clouded most things because of the economy.

But specifically ARX, it's obvious to us that we need to get more focused and more specialization.

To be frank, the leverage that we thought we would get out of the channel isn't quite there.

That's why we've been investing in specialists.

And I mentioned that we did a press release and two very senior hires with a lot of storage expertise, both in sales and marketing.

They're up and running, joined the Company, and already up and running and have been involved in the strategy going forward.

And we've also hired, across the board actually, in functions in terms of specialists, and we think that's going to bear the fruit.

We're absolutely convinced about the solution.

We're convinced about the ROI and the market.

And really, we're convinced this is now a sales and marketing execution.

We're very focused on being successful on it.

Aren't there -- since you bought the assets though, aren't there a lot of other kind of newer technologies that have come out that may mute the impact of what Acopia was designed to do in file virtualization?

It seems like if you look at some of the players in the storage market, they've come out with clustered file systems which provides the non-scalability, if you look at, like a net adv series, it allows you to virtualize third party arrays.

It just seems like in the last couple of years since the Acopia acquisition, there has been some competitive offerings that have come out that seem like there are alternatives, at least, to going with file virtualization, how do you guys position against things like that?

The quick answer is not at all.

We did the North American quarterly business review earlier this week and it is interesting.

We had some people actually making their quota in ARX only.

But when you look at the competitive aspects, it was almost nil.

It was almost zero.

Brocade actually had a product and end of lifed it, we don't see much--.

The thing is, it is the only real heterogeneous solution out there.

And in terms of the clustered file store issue, we see the opportunity as partners, we're still partnering with the data, the main side of the EMC partnership.

That's still ongoing.

So, no, we don't see that.

If we see that, we would call it out.

But we're convinced it needs more specialized focus on our end.

So, the pitch is basically heterogeneous.

Yes.

And the massive ROI.

Okay, thanks, guys.

Okay, thanks.

Next question from Samuel Wilson.

Please state your company name.

JMP Securities.

Good afternoon, gentlemen.

Just a quick question.

I just want to get -- this is kind of qualitative, kind of quantitative.

But I want to get a sense for deal size, average deal size that you're seeing in the December quarter versus six months ago, and versus like a couple of years ago.

I'm looking for a question of, are customers back to normal in terms of the size of the deals in the purchasing they're doing right now in the December quarter?

Yes.

Actually, Sam, what we've seen over, really the last three or four quarters, and we believe this is mix driven.

So, VIPRION 8900, 6900, what we're measuring now is our average order size trend up pretty nicely.

As far as two years ago, comparing it, to be honest with you, I actually don't have that data because we used to give average deal size which just got to be too difficult to ascertain.

And we switched to this average order size.

We've really been tracking that over the last year to year and a half.

But we have been seeing it trend up.

I think Mark might have some color on that.

Hey, Sam.

I think what we're also seeing is, certainly in the first half of -- sorry, the second half of 2009, we saw customers really buying based on urgent necessity but minimizing the expense.

Because they were certainly top line concerned.

I think in the last six months, we've seen that open up quite a bit.

So, we're seeing people buy bigger configurations, we're seeing people buy more boxes, more data center consolidation.

Just more projects that I talked about at the analyst conference back in November.

Got it.

That's the color I was looking for.

Thank you.

Sure.

Okay, our next question comes from Troy Jensen.

Please state your company name.

Piper Jaffray.

Couple of quick questions here.

Curious if, John, maybe you could talk about your traction with the VMware partnership.

And then, is there any way to quantify maybe like a percentage of unit shipments that are front ending virtualized servers.

Yes, the traction is going extremely well, and in fact, we actually track that now, within salesforce.com, we actually measure it.

We wouldn't give out any numbers on this, Troy.

But it is increasing rapidly.

So, the number of virtualization deals that we're seeing, that we're working, across the board, obviously, VMware is the most common one, has been going up very significantly over the last nine months.

Perfect.

And then John, you've given over the last couple of quarters, the percentage of systems that are running the version 4 operating system.

I was wondering if you could update us.

Yes, Julian's just telling me here it is approximately 15% still.

15?

I thought it was 9% at your analyst day or am I mistaken here?

We'll check that, Troy, but we think it is 15%.

But we'll check it.

All right.

Perfect, guys.

Keep up the good work.

Next question from Brian Marshall.

Please state your company name.

Hi, thanks, Broadpoint AmTech.

Nice quarter, guys.

Question with regards to the ramp in the OpEx.

Looks like on a pro forma basis, we increased about a little over $8 million.

Going forward, I was wondering, with regards to the leverage in the model, I mean seems like you're going to be increasing your rates of hiring going forward.

So, just wondering in terms of sustainability of that ramp in the future, it looks like over the past couple of quarters, past couple of years you've averaged $2 million incremental add on a quarterly basis.

I was wondering if you expect that to uptick here a little bit in the next several quarters?

Well, as we've said, we definitely invest behind revenue.

So, that's the mode that we make decisions in relative to our spanned headcount, other investments.

The last couple of quarters, we've been at this above 31% operating margin level.

And I think if you lay out the numbers that we gave you, relative to our revenue and spend and gross margin, you'll see that for the coming quarter, we think we'll stay in that relevant range right there, about 31%.

And I would want to highlight that I do think that's a sustainable model.

We're top-line driven.

We want to grow our revenue.

We're going to invest to do that.

But we do believe overall, our margin structure, we can sustain it.

We'll update you quarter by quarter, tell you what we plan to hire, and then as we always say, we'll watch our revenue very closely.

We track it.

We get revenue daily.

We track it weekly.

We assess how we think we're doing against expectations, histories, seasonality.

We make our investment decisions accordingly.

Thanks, Andy.

And then final question with regards to the telco/service provider vertical.

It looks like this has been kind of low 20s in terms of mix of total revenue.

Would you expect that to uptick here in the next couple of quarters, as service providers start coming back to the well, so to speak?

Absolutely.

As I'm sure you know, a lot of telcos will shut down their network additions in the December time frame.

So, we really expect to see some traction.

We have some good-sized projects that we're getting traction on this quarter and for the rest of 2010.

Yes, and as we've said earlier, it is based on mobile data applications.

We just don't see that slowing up in the short term.

Because remember, we are very much at the layer 7 user added value end of that.

And that's just starting.

And all of the browsers on blackberries, on iPhones, are driving network traffic through the roof.

Sure.

Safe to say this is probably your fastest growing vertical for calendar year 2010?

Probably.

But there's also some other stuff going on in the technology vertical as well.

And federal, we're feeling very good about federal business.

I mean it was down sequentially US federal, which you would expect last quarter.

However, it was the best Q1 federal that we've ever had.

So, and we know we have a lot of projects there.

So when we look at the year, we feel good about federal actually.

Thanks, guys.

Next question, Mark Sue.

Please state your company name.

Hi, Mark Sue, RBC Capital.

John, is there a notion of catch-up spend from the lack of spending last year, and are we resuming a lot of these projects?

Is there a time ticket to a lot of these projects that you're seeing now?

And your thoughts of maybe relative strength, the first half versus the second half of this year.

And I ask because typically, you say the goal is to grow revenue sequentially each quarter.

Now, you're saying you absolutely positively will grow revenues in the quarter.

I think the word that (inaudible) always talked about is believe.

We believe.

In terms of the catch ups, I guess there must have been some catch-up because, I use the phrase pause in the first half.

And I picked that word specifically because it was only a pause.

We didn't see a massive amount of budget plush as such.

We didn't see much of that.

You saw -- the guidance Andy talked about for this current quarter, which is normally a soft quarter for us historically.

And that guidance is based on book-to-bill equal to one.

So, clearly, we feel pretty bullish about that.

And as I said in my bit, the market drivers look good for us.

Data center, consolidation, virtualization, cloud computing and mobile data all feel good.

So, I don't think it has been a massive catch-up, and then there's going to be a delay.

It doesn't look like that.

But I always throw in that cautious thing, given the events of a year ago.

Is there any part on the length of visibility, just kind of how that's changed from a year ago?

Can you kind of see pretty clearly six months out at this point?

That would be too strong.

We feel good about our visibility on a quarterly basis.

We feel reasonable about it on a six monthly basis.

I also mentioned our pipeline is very solid.

All of the pipeline metrics are looking really good.

Okay, helpful.

Thank you, gentlemen.

Thanks.

Next question comes from Erik Suppiger.

Please state your company name.

Signal Hill.

Congratulations.

Couple of quick questions.

First off, for the March quarter, do you always forecast based on a book-to-bill equal to one?

Historically, that's been our -- about the methodology that we have applied to coming up with guidance.

Seems like you've had book-to-bill at less than one in some quarters.

Well, actually, if you go back, I know at least the last three and probably four years, our book-to-bill in March has ended up being less than one.

But we still guide based on equal to one.

Okay.

Not typically, we're not making a statement that forever we're going to do that, but I think if we (inaudible) I would probably get some indication.

Okay, sounds like you have some pretty strong backlog right now.

Are your lead times extended at all?

Yes, with the increase in demand we've seen out there generally for our business, is we've gone out and dealt with the supply chain.

We've seen some issues but our manufacturing team has been all over it and managed us through it well.

So, on certain products, we've seen some extensions.

But I think we're managing it pretty well.

I would presume you would be reluctant to add much more backlog though in light of extending lead times any further?

Yes, I think that's a fair assessment given the size of our business and the size of our backlog today.

And then lastly, the remote access product, it sounds like you're just introducing the blades to support that.

Is that something that is going to be contributing to revenues in the March quarter, or where is that from a revenue perspective right now?

Erik, this is Karl.

The APM module is actually available across our entire hardware line-up.

It's not just available on the PB200 blades.

So it is just like any of our other modules that we release, typically we make them available across all, especially all of our newer platforms.

So, everything from the 1600 all the way up through the PB200, customers should be able to license that module.

Erik, this is Dan.

One of the things with the latest version, 10.1, of the software is, there is an awful lot of stuff in there, as John mentioned, I think 118 different features including APM that Karl just spoke about.

Edge gateway as well and a myriad of other things.

So we actually embarked on the launch process for that toward the end of November.

And now we'll actually continue out into this quarter as well.

So, you'll see more things, but we do expect that to contribute to revenue this quarter.

Is the secure access piece getting much adoption?

Early days now, but yes.

I'm looking forward to good things from that.

Very good, thank you.

The reaction from our presales system engineering force when they were trained on it was pretty positive.

We view that as a very good litmus test.

Very good.

Thank you.

Thanks.

Next question from Jeff Kvaal.

Please state your company name.

Yes, thanks.

This is Jeff Kvaal from Barclays Capital.

Andy, a couple of questions for you.

One is, in recent quarters, you've talked about the closed rate assumptions that you've used in setting your guidance.

Is that something that you can share with us this time?

Yes.

Definitely we've talked directionally about that.

About the level of conservatism, and I think if you compare it to prior to the economy kind of dipping down a year plus ago, we're not back to those levels yet.

But I think with the increased visibility that we feel we have now, the confidence in our business, we probably have brought that up a little bit compared to last quarter.

But also, the close levels of this quarter actually we're assuming less than last quarter.

So, we're assuming more conservatism.

However, I don't want to give you the wrong impression here.

In reality, Q1 close levels, the close levels in this current quarter, the Q2, do tend to be slightly behind anyway.

So, we're almost back to normal, one quarter versus the other comparison.

So more conservative than last quarter, but we should expect to do that anyway.

Okay.

So, it is fair to say that there is a little bit -- you're now feeling comfortable enough to inject less conservatism in those assumptions than you might have for the past four or five quarters.

That's correct.

Ok.

All right.

Good.

And then the corollary, I guess, to you talking about book-to-bill equal to one in March is then, while March obviously isn't going to be as weak this year as you had prepared us for in the past, it does seem as though there's some likelihood that it may still be the weakest quarter of the fiscal year.

Is that a fair assumption?

I wouldn't categorize it this way.

Certainly, at the beginning, when we talked at the conference in November, Andy mentioned that we expect to grow sequentially but possibly not in the March quarter.

Clearly, we're more optimistic now than that.

I think from a March perspective, this is looking like a pretty solid quarter.

Okay.

Okay.

Sounds good.

Thank you very much.

Next question from Ryan Hutchinson.

Please state your company name.

Lazard Capital Markets .

Good afternoon, guys.

I want to try and look at this another way.

Everyone's asking sort of the same question.

The book-to-bill is greater than one.

The pipeline is there.

The close rates are better or a little bit more conservative given the seasonality.

But I think what's on everyone's mind is the fact that this large deal, which everyone, certainly myself, thought would be more linear in fashion, was indeed a little more front-end loaded.

At the same time, you're giving pretty aggressive guidance in the March quarter.

John, I know you've quantified it in a number of different ways, but maybe dig down a bit deeper in terms of more large deals that you have and the more tricks in your bag.

Just some more color around the guidance you

I think it is pretty straightforward actually.

The last deal that we got, as we said it was right at the end of the quarter and went into backlog, moving into the quarter we just finished.

And we're moving into this quarter with more backlog, so the big deal from that perspective in terms of (inaudible) becomes irrelevant almost, because it is all about our bookings rate, and our bookings rate was clearly very, very solid last quarter.

And then we also mentioned our pipeline in general is very strong right now.

So, the backlog of book to orders is bigger and the pipeline is bigger.

Okay, fair enough.

And I'm assuming there is probably some additional large deals on top of that that we haven't uncovered in the field.

Well, I mean with a backlog going up, we obviously won a number of big deals.

We talked about the technology vertical, they tend to be bigger deals.

But you know, it is not something we talk about publicly.

Fair enough, and then finally just a clarification, should the sales and marketing line dip down or be flattish on a sequential basis in absolute dollar terms?

I think in absolute dollar terms, you'll see it go up with sales and marketing.

Okay, great, thank you, guys.

Next question from Min Park.

Your line is open.

Please state your company name.

It is Min Park from Goldman Sachs.

Thank you.

Just a couple of quick questions.

I just wanted to first see if you can give us your thoughts on the competition more broadly, and if you can comment on any changes in your win rates this quarter versus prior periods.

Yes.

We're not seeing -- I mean I mentioned in my introduction that I think this is the strongest competitive position that we've been in.

That's a pretty clear indication of where we view it.

We are not seeing much change.

We don't see much of Cisco in the field.

We see Citrix obviously, and then we have some other smaller players but there's no -- there's really not been significant change.

And obviously, we won't see -- we did gain share last quarter.

And we'll see what happens this quarter given the results.

Okay.

Sorry, and one more thing, obviously the gross margins have been very solid, which is probably the best indicator of competition.

And then, have you seen any changes in the pace of your new customer adds, and also Andy, if you can give us a breakdown of revenue between current customers and new customers?

Yes, actually, the way it broke down was we were at about 69% from existing customers.

This quarter, which is actually up a little bit, we still think that's indicative of the economy, and also, the large deal that we've all been talking about came from an existing customer.

And that impacted it.

But we still feel good about our new customer additions.

We'll watch it very closely as we evaluate our growth opportunities there and we feel good.

Great.

Thank you very much.

Okay.

This is John Eldridge.

We are going to take two more callers then we're going to wrap it up.

Okay?

Okay, next one, Brian Modoff.

Please state your company name.

Deutsche Bank.

Couple of questions.

John, on ARX, 3% of revenues now, you put a lot of resources in, people out at BMC.

You're hiring a lot of people into that.

When does that become more significant at say a 10% piece of business?

And then your EMEA business, it seemed to perk up in the quarter.

What are you seeing?

Anything you can provide in terms of some color around how Europe is doing overall?

With ARX, we have a goal this fiscal to, on a quarterly basis, get to double digits in revenue.

We're pretty convinced once that starts, that we'll start to see the momentum.

The momentum builds momentum.

That's a short term goal.

We haven't given any more -- example, we're not saying when we would expect it to be 10%.

We do think, by the way, the drivers in the other side of our business are very strong.

So from a percentage point of view, I'm not so concerned about that.

It is more about getting absolute dollars up in ARX.

And then I mentioned EMEA was the star of the quarter.

They had a very solid quarter, both in terms of revenue growth and bookings growth.

Sales bookings growth, as well.

So, which bodes well of course for this current quarter.

And the main reason, we have had a change of management in EMEA over a year ago.

It is clearly having an effect, overall.

They're winning really big deals, I mentioned several deals above $1 million.

And they're starting to look like the profile that we have here in the United States, from a large deal perspective.

So, that's the trend we want to see in all geographies.

Finally, on Japan, talking about Japan being better this quarter.

Is that because you have a new VIPRION blade into customers over there that's starting to ship this quarter?

It is actually more related to seasonality and that we're coming to -- toward the financial year end in Japan.

So, we would expect to see that.

That's what the forecast is indicating.

Okay.

Thank you.

Okay.

Then our last question today comes from Jess Lubert.

Your line is open.

Please state your company name.

Good afternoon, guys.

Wells Fargo Securities.

Thanks for squeezing me in.

Nice quarter.

Couple of questions.

First, can you discuss TMOS version 10 penetration rates, and to what extent product strength is being driven by hardware upgrades fueled by the adoption of the new operating system?

We don't give out specific data on the actual penetration rates.

Most of the stuff we're shipping though, unless the customer requests it, is now v 10.

The real issue is when we bring v 10, we add new functionality, and like v 10.1 that we talked about with the extra modules, that's the real interest to us because that drives incremental revenue.

But from a penetration point of view, it is pretty significant now in terms of the number of shipments.

I don't think we have the actual percentages but it is now our key operating system revision that goes out after the customers.

And then from a vertical basis, it looks like sales in the financial vertical were up more than $30 million sequentially, suggesting an uptick in business from financial customers outside of the large deal.

Can you discuss what you're seeing in that vertical and whether or not there are other large deals that are contributing to the strength, and how we should think about the financial vertical over the remainder of the year?

Oh, yes.

We -- consolidation is definitely a big opportunity.

Business consolidation that then drives IT consolidation that drives data center consolidation.

That's going to be I think a continual opportunity for us.

I did say, by the way, that from a bookings perspective, the verticals were pretty much in line.

So, yes, it was strong.

I think it was above the 20% mark.

That's pretty much in the norm for a good, strong financial.

But yes, financial technology and obviously service provider are still -- they're the key ones that we would expect to see in the 20% plus range.

Maybe slightly below 20 but usually above 20%.

And then finally on ARX, some of the large Wall Street banks were early adopters of the product.

Now that you're seeing some of the financial customers come back and put money to work, are you seeing renewed interest in ARX amongst these customers, and how is that impacting the outlook for this product going forward?

Yes.

We have been seeing multiple shipments in some of the sales that were actually done either before or around acquisitions.

So, we have seen some of that.

Our main focus spot is getting new customers and driving across all of the verticals.

And that's been slow.

But with the focus I think we're putting in from an investment, we want to see that increasing.

But right now, ARX, the majority is not from a financial vertical, is that correct?

I think it depends on the quarter.

There's been quarters where the financial vertical with ARX has been pretty solid actually.

All right.

Thank you.

Okay.

Okay, thank you all very much for joining us.

We look forward to seeing many of you during the coming quarter.

Thank you.

That does conclude the call for today.

You may disconnect your phone line at this time.