F5 Inc (FFIV) 2010 Q2 法說會逐字稿

Good afternoon and welcome to the F5 second 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 so much and thank you all for joining us on today's second quarter fiscal 2010 conference call.

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

Other members of the executive team are also here to answer your questions following our prepared comments.

If you have questions after the call today direct them to me at 206-272-6571.

If you don't have a copy of today's press release, you can access it at our website at www.f5.com.

You can also access an archived version of today's live webcast from the events calendar page of our website through July 21.

From 4:30 p.m.

until midnight Pacific time April 22.

You can listen to a telephone replay at 888-562-4490, or 203-369-3757.

During today's call, the discussion will contain forward-looking statements that include words such as believe, anticipate, expect and target.

These forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these statements.

Factors that may affect our results are summarized in our quarterly release and described in detail in our SEC filings.

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

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

Thank you, John.

F5's financial results for the second quarter of fiscal 2010 continue to reflect improving business climate and strong demand for our application delivery controller products.

Revenue of $206.1 million, was above our guided range of $195 million to $200 million, and up 8% sequentially from $191.2 million in the prior quarter.

GAAP EPS of $0.41 per diluted share was above our guided range of $0.36 to $0.38.

Excluding stock-based compensation expense, non-GAAP EPS of $0.56 per diluted share was also above our guidance of $0.52 to $0.54.

Product revenue of $129.6 million grew 9% sequentially and represented 63% of total revenue.

Service revenue of $76.5 million, grew 6% sequentially and accounted for 37%.

Book-to-bill for the quarter was greater than 1.

On a regional basis, the Americas represented 57% of total revenue.

EMEA accounted for 24%, APAC 11% and Japan 8%.

Revenue from our core application delivery controller business was $195.8 million, or 95% of total revenue.

Revenue of $4.3 million, from our ARX file virtualization products, was down from $5.7 million in the prior quarter, and accounted for just over 2% of total revenue.

Prior pass revenue of $5.9 million was also down from Q1, and represented 3% of total revenue.

During Q2, the financial and telco verticals each accounted for 20% of revenue.

Technology was 24%, US federal was 6% and total government revenue was 10%.

During Q2, we had two, greater than 10% distributors.

Tech data, which accounted for 11.1% of revenue and Avnet, which represented 13.8%.

Moving down the income statement, GAAP gross margin in Q2 was 79.9%.

Excluding approximately 1.7 million of stock based compensation expense, non-GAAP gross margin was 80.7%.

GAAP operating expenses of $114.8 million, were slightly above our target range of $110 million to $114 million.

Excluding $14.8 million of stock based compensation expense, non-GAAP operating expenses were $100 million.

GAAP operating margin was 24.2%.

Non-GAAP operating margin, which excludes stock-based compensation expense, was 32.2%.

Our GAAP effective tax rate was 36.4%.

Excluding stock based compensation, our non-GAAP effective tax rate was 34.2%.

On the balance sheet, we ended the quarter with $712 million in cash and investments.

Cash flow from operations was $78 million.

During the quarter, we repurchased approximately 365,000 shares of our common stock at an average price of $54.75 per share, for a total of approximately $20 million.

DSO ended the period at 39 days.

Inventories at quarter-end were 16.5 million.

Deferred revenue increased 7% sequentially to $226.5 million.

Capital expenditures for the quarter were $3.2 million, and depreciation and amortization expense was $6.1 million.

We ended the quarter with approximately 1,820 employees, an increase of 80 from the prior quarter.

Moving on to the Q3 outlook, we continue to see the prospect of continuing sequential revenue growth through the second half of fiscal 2010.

For fiscal Q3, we are targeting revenue in the range of $214 million to $219 million.

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 $118 million to $122 million.

This includes approximately $15 million of stock-based compensation expense.

Our GAAP EPS target is $0.42 to $0.44 per diluted share.

Excluding stock compensation, our non-GAAP EPS target is $0.57 to $0.59 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 34%.

We plan to increase our head count by 80 to 100 employees in the current quarter.

We estimate our DSO will be in the low 40 day range.

We expect inventory levels within a range of 16 to 18 million, and we believe our cash flow from operations will be in excess of $70 million.

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

Thanks, Andy and good afternoon everyone.

I was delighted with the F5 team's performance in Q2.

Our overall business has experienced increasing momentum since April last year, and that momentum continued and grew stronger in Q2.

Revenue increased sequentially in all our major geographic regions.

And I was especially pleased with our growth in product revenue, which was up 38% over Q2 last year.

Overall sales bookings were also very strong with book-to-bill above 1 in the quarter.

This is the first time in five years that our sales book-to-bill ratio was greater than 1 in the March quarter.

Once again, we improved our balance sheet significantly, with $78 million cash from operations and we closed the quarter with $712 million in cash and investments and no debt.

As we mentioned in the press release, business in North America and EMEA was very strong, driven by several large deals in those geographies.

Data center consolidation and mobile data traffic growth continued to be major drivers of our business resulting in an increasing number of large transactions.

Yet again, our services business produced stellar results and continues to be a key growth driver and a key profit contributor to our business model.

We have been able to achieve these outstanding financial results while maintaining customer satisfaction at world class levels.

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

We believe that our competitive position is the strongest it has ever been and our product road map will not only maintain but significantly enhance our leadership position with a range of exciting new products scheduled for release throughout the current year and beyond.

Our ARX business was down sequentially from last quarter and came in below our internal forecast.

With a number of relatively large forecasted transactions not closing in the quarter.

We expect most of these transactions to close in Q3 and the ARX business in Q3 to be up sequentially from Q2.

We have numerous examples of project wins in which customers have realized compelling ROI's by implementing ARX-based solutions.

Our task is to utilize these very compelling value propositions to grow the ARX business in the second half of fiscal 2010 and exit fiscal 2010 with ARX quarterly revenue above $10 million.

As I mentioned earlier, our overall product road map features several exciting new additions and enhancements to the current product lineup, including new point products, enriched functionality, and improved performance.

Indeed, over the next few days, we will be be announcing a number of new products designed to increase our competitive technology leadership with products specifically targeted at key growth areas such as virtualization, cloud computing and mobile applications.

We will be introducing a range of solutions that are designed to remove the barriers to entry and facilitate enterprise adoption cloud and virtualization architecture services.

I will not go into these product announcements in detail as they will be highlighted over the next few days and demonstrated at the Interop show in Las Vegas next week.

We are also on track to deliver a comprehensive range of new products towards the end of the year and throughout 2011.

For example, we plan to expand our popular line of chassis-based VIPRION application delivery controllers with products at price points comparable to the mid-range of our big IP appliance family.

We will also deliver significant performance improvements in our entry level and mid-range appliances by leveraging elements of the VIPRION technology.

We plan to integrate a virtual clustered multiprocessing called VCMP.

Enter TMOS, giving customers huge flexibility to design and implement state of the art architectures which optimize virtualization and cloud based technologies.

These are just some of the many features which we believe will significantly increase our technology leadership, as well as creating a huge barrier to entry for our competitors.

As far as the overall business outlook is concerned, I feel very optimistic given the strong sales momentum we are currently experiencing combined with a very solid pipeline of future sales opportunities.

As I mentioned earlier, we feel very positive about our competitive position of technology leadership and our ability to maintain and increase that leadership position.

Key drivers for our business including data center consolidation, virtualization, cloud based services and a growth of mobile applications and data, all continue to produce strong momentum in each of our vertical markets.

F5 Solutions occupies strategic control points across global data centers and we are extremely well-positioned to take advantage of these trends.

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

Thank you.

(Operator Instructions) Our first question comes from Ittai Kidron.

Your line is open.

Thank you very much and congratulations, guys on a great quarter.

Hopefully I'd like to dig in a little bit into Acopia, John.

Since you acquired that asset, I don't think there have been two quarters in a row where you actually predicted that business correctly.

And so I want to get a much better understanding as to the degree of confidence you have in your ability to reach that $10 million mark later in the year.

What is it that you're seeing?

Are these contracts that are already signed and it's just a question of time when revenue recognition?

Why it is being such a hard asset to predict?

And again, where do you get the confidence in still sticking to the $10 million number bogey?

Okay.

Yes.

And I understand the question.

I'm not sure about your point, by the way, on the only two quarters for that ability.

We had a number quarters of sequential growth.

But that said, the question is very very valid.

It's a number of things.

First of all, you may have remembered we hired some key individuals last quarter.

They are coming up to speed.

There's been a lot of good changes going on.

And we think that's going to have an impact.

But more specifically, if you look at the business, they do tend to be larger transactions than Big-IP transactions, ARX, and that does to some degree give you some lumpiness, that's one thing.

We've mentioned a number of times, as a compelling ROI with the project and we have a number of customer testimonials, some we've been public on, that actually prove that out.

So given the ROI, I wouldn't classify ARX as a nice to have, but to be honest, I don't believe it's a must have, like our ADC business.

So, you can continue with the project, you continue buying storage and not make the decision and delay the signal, we've seen some of that.

Now having said that, we feel pretty good about Q3.

We do believe that Q3 is looking stronger.

There are a number of reasons for that.

There's the fact that deals have slipped.

But also the pipeline is pretty reasonable as well.

We are not guaranteeing we will get to the $10 million by the end of the fiscal, but we think it's very, very achievable.

Getting in to the reasons behind the slippage, is this just anything specific in to that, if some of the storage guys which typically would be pitching some competitive solutions have been trying to freeze the market?

What are you seeing there?

No, not that at all.

It's definitely, and this is almost 100% reason, where we see the projects, we got close dates that frankly drift, that move forward for one reason or other.

Whether it's other priorities and implementing other projects, whether it's deciding to keep the budget for time being.

But not competitive.

And as I say, we expect most of these things to close in Q3.

Alright.

Good luck.

Thank you.

Brian Marshall, your line is open.

Great.

Thanks, guys.

I was wondering if you could comment on any large deals that you may have signed that were in the telco, as well as the financial service sectors.

We wouldn't really comment by names or anything, but we've seen a number of large significant telco deals all related to mobile, multimillion dollar type transactions.

By the way, you didn't ask this question but it's worth bringing it out.

You may have noticed the telco revenue was towards the bottom end of the 20-25 range, percent that's it's normally in.

The sales bookings were actually higher than that and they were much more normal.

So we feel very good about telco Vesco.

But, I'm not going to be specific in deals, but we did see multimillion dollar transactions.

So safe to say that you expect the percent of total revenue from telco service providers to be increasing in the June quarter?

Probably, yes.

Okay.

Very good.

Probably.

Was wondering if you could help us quantify the TAM opportunity or TAM expansion, that the VE or Virtual Edition BIP will bring when that product becomes available later in the second half of this year?

Okay, so Brian this is Dan Matte.

The expansion from the BE standpoint, we look at the Gardner forecast.

The ramp is like a $10 million to $40 million to $60 million over the next couple of years.

I think frankly there are greater opportunities than not for it just looking at the way that it's been accepted so far, and the feedback that we are getting from our customers in the types of projects that it's triggering already.

So, I would classify those numbers as pretty conservative.

And one final question on that.

VMware last night mentioned that they are shipping some load balancing modules and they've seen a pretty big rise in terms of that demand, Is that an F5 module or is that something that they have internal, do you know by chance?

Yes.

Absolutely.

I wish they would call it something else because it's really not the same thing that we do.

But, being what it is, their technology and what they're calling load balancing is their technique of making sure that CPU and memory utilization is balanced across different physical servers that are a part of a cluster running the same vm, which is something totally different from what we do in terms of directing traffic into those systems.

So, entirely complementary, unfortunate name choice, but it's good for us that the two are symbiotic.

Understood.

Thank you.

Also, I mentioned that we're coming out with a number of products in the next few days that are going to help a lot in virtualization and the cloud and areas like that.

Some of those are very, very linked towards a partnership with VMware.

Thanks John.

The next question I'm showing comes from Brian Modoff.

Your line is open.

Yes, hi.

This is Vijay calling on behalf of Brian.

Question for you, John.

Hi.

Question for you, John.

In terms of, if you could help us articulate the mobile internet use, because obviously we are seeing 250 million smart phones in the U.S.

and lots of TCP connections for smart phones load under the messaging traffic in mobile operators.

Just help us understand the VIPRION opportunity in mobile internet.

Yes, (Inaudible) VIPRION has been the first word out of my mouth.

That most of these bigger deals we're talking about are VIPRION-based, chassis-based, quite often net-compliant, but definitely designed for the telco-type world.

And it's all about through-put and it's about the ability to manage things like stealing of data, compressing of data, optimizing data, policy engines, really the stuff we've talked about the over the last three to six months, that we're continuing to see good momentum with.

And then, to follow up.

You speak about virtualized data centers and environments.

I've been following the topic quite closely as well.

If you look at VM environments, do you think you would need any fundamental bits to your Big-IP product or can you leverage what you have in the current product in vm environments?

We're leveraging what we have, but we're also enhancing it at the same time.

So we're doing both.

What we have has got massive added value right now, but I mentioned that in fact we're going to do some announcements on VMware sites specifically if the next few days.

And obviously the Virtual Edition version is very critical in that environment as well.

Okay.

Thanks, John.

Good luck.

Alex Henderson your line is open.

Thank you very much.

I was wondering if you could give us a little bit more sense of the rate of growth within the service provider space?

Obviously, that's a critical element of the mix , there is clearly some seasonality in there.

Can you help us think through how they -- this trajectory should look over

Yes, the way to think of it -- if you look at last quarter, as I mentioned that the sales bookings were pretty much normal, which is approaching the 25% number is what we've seen.

And given that that was pretty normal and you can see our growth rate in product was in the 30's you should assume that vertical was in the same area.

So what we don't expect, we do think there's a possibility of telco ticking up, but we do see a lot of opportunity in the enterprise with data consolidation as well as the technology space like social networking.

So I don't see it ticking up considerably, I think it's just one of our three key verticals that we think is going to keep growing.

Yes, if I could add one more clarification.

The products that you talked about announcing next week, are we to assume the products are available when announced, as opposed to announced and then available some point in the future?

No, no.

Available when announced.

Yes.

Great, thanks.

Next question comes from Brent Bracelin.

Your line is open.

Thank you.

A question really on the sustainability of growth here, John.

If I look at product growth, 38%, looks like it's the highest since 2006.

If I think about the last four or five years ago, you introduced a major platform upgrade, drove acceleration and product growth for several years.

How should we rationalize what you are seeing now?

How much of the growth is tied to more of a rebound off of a challenging 2009 versus really the benefit of potential share gains tied to the Version 10, 10.1 product cycle?

Can you help rationalize how much of the (inaudible) here is just a rebound and how much of it really can be attributed to a product cycle that has some legs?

Unfortunately, Brent, it's all of the above.

I definitely, there is some element of rebound in a sense that the comparisons are easier, that's obvious.

That clearly continues in to next quarter as well.

I truly believe the real answer is that the momentum in our vertical markets, that the drivers we were talking about, the telco driver, the data center consolidation which we think is there for a reasonable amount of time.

Our competitive position, I mentioned, is strongest it's been, we're adding to the product road map.

We think we're going to see some momentum for the foreseeable future.

Obviously, we only give a quarter's guidance, but we will, when we get to October, we will get some feeling for 2011 as well.

Helpful.

And then just one quick follow-up.

Clearly, you anticipated the tech internet vertical to spike here.

It certainly did.

As you think, you mentioned telco could rebound next quarter based on the bookings momentum.

What's your visibility on the tech internet vertical side?

Still some big opportunities there, or could you --?

Oh, no.

Big opportunities with good visibility.

Okay.

Great.

Thank you.

Yes.

Next question comes from Mark Sue.

Your line is open.

Thank you.

John, are there other large financial services consolidation type of deals out in the horizon or do you feel that we are still in the early stages of data center consolidation that you don't need it for continued sequential growth?

And just overall as we look at your top line growth prospects, do you think it gets progressively harder as the numbers get larger since you already own the market and the share of gains get a little bit tougher for you?

Yes.

Right.

On the first question, Mark, the financials, financial business consolidation giving us opportunity for overall data center consolidation, yes, there are continuing to be opportunities.

In fact, last quarter we saw one of those opportunities starting to bear fruit.

So, I think that's going to continue.

Having said that, I think data center consolidation is all over the place.

So, in terms of providing sequential growth, that's going to do that.

The big thing in the growth, I think we are going to keep getting share, given a strength of the product line.

I'm not privy to exactly what the competition are doing, but I can see where we are today, and I can see the rate of the product road map and the features and it's going to be very difficult to follow.

As when you talk about taking VIPRION chassis-based solutions right into the mid-range effective pricing, that is a difficult thing to combat competitive-wise.

And then this whole virtual cluster multi-processing that we're talking about, this is very complex, but it's really in the sweet spot of cloud and virtualized tech type architecture.

So, I do think we are going to keep going as you get bigger, of course the numbers get tougher, but we feel good about the momentum.

John, what inning do you think we are in data center consolidation?

You'll need to ask -- I'm a European, I'm not a baseball guy.

I'll ask Andrew that one.

I think our position is we still see in data center consolidation we're in the early days of what I think is going to be -- I think we all do, a big wave of consolidation for efficiency gains that you can get.

Okay.

That's helpful.

Not the same as the World Cup, Mark.

Thank you.

The next question comes from Ryan Hutchinson.

Your line is open.

Good afternoon, guys.

Just a question for Andy, a lot of noise around changes in RevRec.

Have you guys adopted any changes related to that?

And if so, when and how much and if not, do you plan to?

Well, we have not adopted anything around RevRec yet, but we have looked at it pretty closely.

Our position is that it won't have any material impact to our revenue.

And in fact, when we do adopt, we will make sure and tell you for the quarter that we're giving guidance that we are adopting it and what, if any impact there is.

Great, thank you.

That's helpful.

Next question comes from Rohit Chopra.

Your line is open.

Hey, guys.

Thanks for taking my question.

We haven't talked about partnerships in a while.

And I was just wondering, John, if you could talk a little bit about how much of a driver have they been for growth?

And maybe you could touch upon a few key people, hp, Microsoft, whoever, that would be my first question.

This is Dan Matte.

I'll run with that one.

Partnerships have been great, really continue to drive a bunch of business for us.

Anything from talking about Microsoft, new versions 2010, exchange share point et cetera, et cetera, clearly very early innings there as far as those products rolling out in the worldwide marketplace.

But seeing great traction for our solutions combined with them.

So, very very happy there.

Other folks IBM seeing lots of traction with their application network performance optimization group.

So lots of things going on on the ground across EMEA and across North America as well so again, very pleased there.

Oracle, similar story, I think we have the most comprehensive set of solutions we've ever had with them.

We announced some stuff, we'll have more things coming up here at Interop.

And then, of course, Dell has been really going strength to strength for us.

So that's great.

Last one I will throw in is hp.

We are seeing different traction across different groups there.

Haven't seen any impact with all this kind of (inaudible) stuff going on.

So, overall, have been very very pleasantly pleased with the results there and we're investing behind those relationships in our personnel worldwide to drive them more.

So, looking forward to even better things in the future.

Alright.

And John mentioned there are a lot of large deals this quarter.

Are these large deals mostly coming from your partners or are they coming from direct or indirect.

Is there a way to rough guess it?

Absolutely.

This is John.

Most of our business is partner driven.

We are very partner oriented organization and we think that gives us great leverage.

So if you look at the deals we work with partners it's a very high percentage.

It might be 80-85, it may be even sometimes higher than that, of our total business.

And sometimes we actually run with most of the deals, sometimes partners do.

Clearly, we would like the latter because it's the most efficient.

But it's (inaudible) to the way we do business.

Alright.

I only have two quick questions after this.

I just wanted to know if the large deal was done and lastly, just on offshoring where you were in that cycle of moving some manufacturing offshore.

Yes.

So to answer the large deal question, yes, that's completely through and out.

And then the offshore --

I missed the --

It's going extremely well.

We basically -- we are phasing it.

We are obviously going to phase it throughout the next 12 months, but we really ramped up last quarter and a lot of the specific part of the Big-IP product line actually came from offshore.

All right.

Thank you.

Troy Jensen your line is open.

Congrats on the nice quarter, gentlemen.

Thank you.

Couple of quick questions here for Andy.

I want to talk about operating leverage, I was wondering if you could give us an update.

You've been able to bump up the operating margins last couple of quarters with investment.

Mid-term, long-term, what are you thinking for operating margins?

Yes.

I think if you look at the guidance that we laid out there, it will probably, our target is to stay at this level range that we are at right now.

I think the results have been principally driven by our philosophy of investing behind revenue.

I don't see that changing.

So, as we look at revenue outcomes, we will continue to invest behind revenue very in a very disciplined approach.

We will see what results that gives us.

Alright.

And a question I typically ask -- can you tell us what percent of the installed base is running on 4.0 still?

It's actually very small.

If we look at it today, most of the platforms that are out there that were originally 4.0 have migrated up.

We continue to go after them.

But it's not, though we go after them for the upgrade opportunity, it's really not a major opportunity for us there that we're focused on.

We're after 10.0, getting people onto 10.0 and driving that opportunity which is much, much larger for us.

Got you.

Last one and I'll get out of the queue here.

DSOs look like all time record low, as far as my model goes back.

Can you just talk about an area in the quarter or why they're below 40 days here?

Our revenue linearity was very strong.

That, combined with collections, just really extremely good.

If you look at the balance sheet, you will see that on both sides of the balance sheet they are just way down.

It was just one of those quarters that everything drove really well on the back of really good business.

So, it definitely took a jump up.

We think it will be pull back a little bit that you see from the guidance.

We will see what it does over the longer term.

Keep up the good work, guys.

Thanks.

Thank you.

Next question comes from [Jeff Call].

Your line is open.

Thanks very much.

I was wondering if you two would mind revisiting the mix of services revenues that you have.

Obviously it's been great, hasn't really fallen off as product revenue has picked back up recently.

I'm wondering how you are feeling for the long-term mix?

Short answer is very good.

I point to the deferred revenue going up again pretty strongly this quarter.

There is a little bit of a lag effect of the service growth catching up to product.

For the foreseeable future, I think we're probably at the mix level we are going to see.

Over the much longer term, I think I would like to see service lower than that.

But, just for the health of the business, but I think where it is is where we are going to see it.

As long as my deferred revenue is growing like it is, it is great.

On the deferred revenue topic, Andy, one of the things that could be a function of the new FASB ruling is that deferred revenue goes down a little bit, right, recognizing in the quarter shift rather than later, so should we be on the look out for deferred revenue declining as a percentage of sales or as a percentage of forward sales?

When I told Ryan, we looked at it and we don't see much of an impact.

You can see on our deferred revenue, it's almost all service revenue that's in our deferred.

We don't have much product at all.

That's really where the impact is is shift from service to product.

I wouldn't anticipate much of an impact there.

But again, when we adopt, which I think will be with our fiscal year, so October 1, when we give guidance then, we will definitely lay that out for you.

Thank you, Andy.

Paul Mansky, your line is open.

Thank you, and I want to echo my congratulations on a solid quarter.

Can you spend a minute maybe talking a little bit about the federal business specifically?

We've been picking up quite a bit related to pushouts into June.

Did you see anything related to that in your March quarter?

No, not really.

We saw strong federal business in the March quarter.

Really, we've doubled the size of the team in the last 18 months.

We really seen great execution.

Selling much bigger deals, getting into much longer-term programs and giving us better predictability and visibility into our pipeline than we ever seen before.

And they're also a strong vertical for ARX, we've seen a pretty good execution there as well.

As we look at the upcoming quarter, can you talk about directional indications vis-a-vis geographies?

Are you expecting all your geographies, maybe ex-Japan off the tough comp, but are you expecting all the other geographies to grow sequentially?

Yes.

We're probably not going to talk about that.

Because at the moment sales booking is really the key issue.

All the geographies were up.

We're probably not going to be that specific this time.

There is no -- and if you look geography-wise, we feel, as we said in the press release and my script, we feel very good about last quarter, especially North America and EMEA, the bigger deals.

We think there's room for improvement and we think we can make that improvement in Japan.

There is a lot of focus going on in that, and we feel good about getting there, having more direct touch.

And then, of course, the growth opportunities in Asia.

But apart from that, we are not going to be more specific.

Okay.

Great.

Thank you, again.

Next question Hasan Imam.

Your line is open.

Hi.

Since we were talking about innings throughout just wondering in terms of 10.1, where exactly are you, innings are you in terms of deployment?

Hasan, early, early innings in that.

We are seeing, of course, the devices shipping out of the factory all come equipped version 10, the latest version.

Only by exception, would somebody ask for something other than that.

In terms of upgrade cycle with the devices out there, still at the very beginnings.

We're tracking that, but very, very early days there yet.

Just to add to that.

We don't want to give you the impression of most of what we are shipping has got version 10, because there's a lot of customers that do want the conversion,so it's a combination of both.

Great, thank you.

And by the way, this is (inaudible).

One follow-up question.

For Virtual ADC, as you start ramping up on that market, do you see that cannibalizing any of the file virtualization business at all?

Definitely not the file virtualization, because they are really, they are in two different areas in the data center, and they do two completely different job roles.

In terms of it cannibalizing the Big-IP as appliance range and VIPRION, we don't see that either.

We see it very much as an add-on cum hybrid solution in an overall architecture.

Not really.

As I said earlier, we think that virtualization is going to be really critical moving forward for architectures, but it's going to be slow in terms of its overall revenue.

I think it's something that's going to be over a year, couple of years before it becomes a significant amount of revenue.

Any idea about the TAM in that market?

As we talked about before, the only real numbers out there for that particular one, this is Dan, are the Gardner numbers hanging out there.

It is very small.

Exactly.

I think we will see what happens as the world turns here.

But, initially, we are seeing a lot of adoption in terms of places like test environments, people coding against it and so we will see.

In fact, we've already seen it pull forward hardware deals of the traditional products as well.

We will see what happens ultimately.

Great, thank you.

Erik Suppiger, your line is open.

Good afternoon and congratulations.

Thank you.

Just two quick questions.

What is the product mix profile right now between low-end, mid-range and high-end products?

Yes so Eric we look at it basically low, low-high.

And it's been pretty consistent over the last two, three quarters at roughly 50-50.

A lot of that we introduced more higher-end products and obviously that drives it.

We'll see.

We feel like it's pretty healthy right now, actually, with the revenue break down.

We're seeing our deal sizes up overall, so we are glad to see that.

It's good.

You say it's been consistent over the last two or three quarters, is that where it had been a year ago or so?

Or is that changed over the last 18 months?

Remember before we introduced the 1600, and 3600 about a year ago, we did see numbers at the lower end, and that definitely helped.

It has improved, but it's stabilized over the last three or four quarters.

Okay.

All right.

And then, did you give the breakout between your installed customers and your new customers in the quarter?

No, we didn't.

But let me get those for you.

New business came about 27% of revenue.

73 from existing.

Looks like the -- it looks like your existing customers came down a little bit did you say?

No, it actually went up a little bit to 73%.

But the good thing we are seeing there, is what we are liking is from existing customers.

We see much larger deal sizes, so we are being driven by that.

We will see how it settles out.

I don't think it's like trended to an extreme.

We definitely are watching it, we definitely have a lot of activities engaged for going after new customers.

We will continue to do that.

But, as Andy said, the key for us is we may get a brand new customer on a $200,000 transaction.

If that's a Fortune 500 company, we would expect to prove ourselves, prove the value, do more selling and make that a multimillion dollar account.

That's what is proving out.

Very good, okay, thank you very much.

This is John Eldridge.

We're going to take one more question and then we're going to wind the call down.

Thank you.

Our last question comes from Samuel Wilson.

Your line is open.

Good afternoon.

I don't quite know how to ask this question without being a little bit blunt, so I apologize up front.

But on ARX, it's about 2% of revenues, I'm sure it's a heck of a lot of higher percentage of operating expenses.

And even if it gets to $10 million, will it turn profitable at $10 million?

And at what type of number do you need to get to get this to be a profitable business before you start thinking about shutting it down?

Yes.

So we don't actually break that out but I will tell you it is the one area of our business where we are not investing behind revenue.

That's something we are very focused on.

I think you will see that as we drive to that goal of $10 million a quarter, we're going to be just as focused on a breakeven in profitable business.

So I will leave it at that.

And the key for us, Sam, is to see momentum.

The $10 million is obviously a stake we put in the ground, it's a stake in the ground that we think is achievable.

But the reality is you look at the momentum beyond that.

We, obviously we look at this a lot internally, and we keep coming up with the solution that we have a great product here that's getting a great ROI to customers.

It's going through some tougher economic times and we think we can get momentum in it.

But momentum is the key thing we are going to look at.

Got it.

Okay.

Thank you.

Thanks, very much, for joining us.

We look forward to talking with all of you again next quarter.

Thank you.

This does conclude the conference call.

You may disconnect at this time.

Have a great day.