F5 Inc (FFIV) 2010 Q3 法說會逐字稿

Good afternoon and welcome to the F5 third-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.

(Operator Instructions).

I'd now like to turn the call over to Mr.

John Eldridge, Director of Investor Relations.

Sir, you may begin.

Thank you, Sarah.

Welcome all, Thank you all to our investors and analysts to our third quarter fiscal 2010 conference call.

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

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

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

If you don't have a copy of today's press release it's available on our website, f5.com.

In addition, you can access an archived version of today's live webcast from the events calendar page of our website through October 26, from 4:30 PM today until midnight Pacific time July 22.

You can also listen to a telephone replay at 800-224-1051 or 402-220-3762.

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 in our SEC filings.

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

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

Thank you, John.

Q3 marked another quarter of strong business momentum, as adoption of our application delivery controller products accelerated, resulting in record results for revenue, gross margin, and net income.

Revenue of $230.5 million increased 12% sequentially from $206.1 million in the prior quarter and was well above our guided range of $214 million to $219 million.

GAAP EPS of $0.50 per diluted share was above our guided range of $0.42 to $0.44.

Excluding stock-based compensation expense, non-GAAP EPS of $0.66 per diluted share was also above our guidance of $0.57 to $0.59.

Product revenue of $147.4 million grew 14% sequentially and represented 64% of total revenue.

Service revenue of $83.1 million grew 9% sequentially and accounted for 36% of total revenue.

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

By region, the Americas represented 59% of total revenue, and EMEA accounted for 22%, APAC 12%, and Japan 7%.

Revenue from our core application delivery networking business was $218.5 million, or 95% of total revenue.

Revenue of $6.2 million from our ARX File Virtualization products was up from $4.3 million in the prior quarter and accounted for 3% of total revenue.

FirePass revenue of $5.7 million decreased slightly from the prior quarter and represented 2% of total revenue.

During Q3, the financial vertical accounted for 24% of revenue, telco was 23%, and technology was 20%.

Total government revenue was 10% including 5% from US federal.

During Q3, we had one greater than 10% distributor, Avnet, which represented 13.3% of total revenue.

Moving down the income statement, GAAP gross margin in Q3 was 80.7%.

Excluding approximately $1.8 million of stock-based compensation expense, non-GAAP gross margin was 81.4%.

GAAP operating expenses of $125.8 million were slightly above our target range of $118 million to $122 billion.

Excluding $15.6 million of stock-based compensation expense, non-GAAP operating expenses were $110.1 million.

GAAP operating margin was 26.1%.

Non-GAAP operating margin, which excludes stock-based compensation expense, was 33.6%.

Our GAAP effective tax rate was 36.4%.

Excluding stock-based compensation, our non-GAAP effective tax rate was 34.3%.

On the balance sheet, we ended the quarter with $781 million in cash and investments.

Cash flow from operations was $75 million.

During the quarter we repurchased approximately 291,000 shares of our common stock at an average price of $68.67 per share, for a total of approximately $20 million.

DSO at the end of Q3 was 40 days.

Inventories at quarter end were $17.7 million.

Deferred revenue increased 6% sequentially to $239.6 million.

Capital expenditures for the quarter were $3.3 million, and depreciation and amortization expense was $5.8 million.

We ended the quarter with approximately 1,900 employees, an increase of 80 from the prior quarter.

Looking ahead to Q4.

Our core drivers remain robust, generating significant growth opportunities going forward, and we anticipate continued momentum in Q4.

For the current quarter we are targeting revenue in the range of $242 million to $247 million.

We expect GAAP gross margin in the 80% to 81% range, including approximately $2 million of stock-based compensation expense.

We anticipate GAAP operating expenses in the range of $129 million to $133 million.

This includes approximately $16.5 million of stock-based compensation expense.

Our GAAP EPS target is $0.53 to $0.55 per diluted share.

Excluding stock compensation, our non-GAAP EPS target is $0.69 to $0.71 per diluted share.

We are forecasting an effective tax rate of 36.5%.

Excluding stock-based compensation, we expect a non-GAAP effective tax rate of 34.5%.

We plan to increase our headcount in excess of 100 employees in the current quarter.

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

We expect inventory levels within the range of $17 million to $19 million.

And we believe our cash flow from operations will be in excess of $85 million.

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

Thanks, Andy, and good afternoon, everyone.

The F5 team delivered another solid quarter in Q3.

We have experienced strong business momentum in the first half of fiscal 2010, and this positive momentum increased again in quarter three.

Each of the major geographic regions performed at or above our expectations.

Quarterly product revenue was up 54% year over year, and our service business grew 33% year over year.

Sales bookings were also very strong across all geographies, with book-to-bill above one for the quarter.

We continue to strengthen our already-stellar balance sheet with $75 million in cash from operations and we closed the quarter with $781 million in cash and investments and no debt.

Our profitability metrics remain world class with non-GAAP operating margins at 33.6%.

From a geographic perspective, the business environment in North America continued to be very strong, driven by several large transactions.

Business in EMEA and Asia Pacific was also strong, with sequential growth and year-over-year quarterly growth in both those geographies.

Our business in Japan had its highest quarterly year-over-year growth in almost three years.

As we have mentioned, many times during fiscal 2010, data center consolidation, using -- utilizing virtualization technologies and explosive growth in mobile data traffic continued to be major drivers of our business, resulting in an increasing number of large transactions.

As Andy mentioned earlier, revenue from our ARX business was $6.2 million, up significantly from Q2.

We saw an increasing number of ARX sales wins in North America last quarter, which we believe is a result of the changes we introduced in our go-to-market strategy.

Our objective is to build on these changes and generate real momentum behind the ARX business.

Our application delivery control business continues to be the major driver of our overall growth, with less transactions at the high end of the BIG-IP product range, as well as multiple VIPRION sales.

Our competitive win rate is extremely high as a result of our clear technology leadership in both performance and functionality.

During Q3 we introduced version 10.2 of TMOS with a host of new features.

With TMOS 10.2 we added a number of features to help extend enterprise data center architecture to the client and enable enterprises and service providers to realize the potential of on-demand IT through our dynamic services model.

We also added new functionality, like client site protection for our application security module, ASM, with features like Cross-Site Request Forgery protection, as well as our next-generation policy builder that allows ASM to learn based on traffic patterns and automatically make policy recommendations, facilitating the implementation of application security.

In parallel with the 2.2 release, we added two new products at the high end of our BIG-IP appliance range, the 8950 and the 1150 models, with throughput of 20 and 40-plus Gbps respectively.

Our software-only virtualization of BIG-IP has created a lot of interest and is driving a number of sales opportunity, as has the recently-introduced virtualization of our FirePass solution.

We expect to extend our technology leadership as we introduce a wide range of new products, enhance functionality, and significant architectural additions over the next 12 months.

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 current BIG-IP appliance family.

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

We plan to integrate a virtual clustered multiprocessing technology, VCMP, giving our customers tremendous flexibility to design and implement state-of-the-art architectures, which optimize virtualization and cloud-based technologies.

VCMP is resonating very well with our customers, as we continue to validate the architectural design.

The VCMP architecture, combined with a new centralized management infrastructure and the ability to create dynamic deployment templates, will be a huge step forward in creating greater value and differentiation across our product line.

Our ARX roadmaps includes the introduction of our software-only VMware version of the product, targeted for the first half of next calendar year.

The software-only version of ARX will be targeted as an OEM for partner solutions.

We also plan to introduce a new cost-reduced range of high-performance platforms next year to allow improved scaling and lower latency, especially important in NFS environments.

In addition, the version of TMOS that will support VCMP functionality I mentioned earlier will also support ARX integration into BIG-IP.

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

As far as the overall business outlook is concerned, I feel very optimistic heading into the final quarter of the fiscal year, given the strong sales momentum we are currently experiencing, combined with our significant backlog.

Also, the pipeline of future sales opportunities has continued to grow significantly on a sequential basis throughout 2010, and this is usually the most important metric when looking forward to next fiscal year.

Our competitive position remains very strong, and we believe it will be able to get even stronger as we execute on our product roadmap and continue to deliver world-leading technology to optimize and secure mission critical applications in the data center.

We believe we have an expanding addressable market opportunity in front of us.

We have significant market opportunities with individual customer account penetration, as well as expansion opportunities from both a geographic and vertical market perspective.

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

F5 solutions occupy 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 their support last quarter, and let's now hand the call over for Q&A.

Thank you.

(Operator Instructions).

Our first question will come from Mark Sue.

Please state your company.

Thank you.

Mark Sue, RBC.

Hi, John.

There were times in the past when the companies struggled because of the macro and now there are times, such as today, when the revenues are accelerating sequentially despite the macro.

In anticipating your comments on the strength the data center consolidation project, how long does that last, and are there leading indicators from your discussion with customers that the trend can last for several years?

Yes.

The feeling that we have -- and it's obviously very subjective, but the feeling that we have when you look at the way -- the phase that data center consolidation is in is it's really at the beginning, so we would expect to see a multi-year opportunity, three, maybe as long as five, with data center consolidation.

It's something that tends to be intrative and it tends to go on for a while, so we think that's going to be a strong secular growth area.

Okay.

Likewise, the [ITD-6] upgrade and the strength you're seeing in Japan, is that something that continues for at least several quarters?

Well, we hope so.

We've been putting a lot of effort into a go-to-market strategy in Japan and particularly with direct touch.

I don't think it's directly linked to ITD-6.

It is a growth driver, but it's not directly linked to that.

I think it's more directed toward execution, direct touch, and then, obviously, going for bigger deals.

Okay, that's all helpful.

Thank you, gentlemen, and good luck.

Thanks.

Our next question comes from Alex Henderson.

Please state your company.

Hi, Miller Tabak.

I just wanted to go to the gross margin guidance a little bit.

You launched several high-end products and software upgrade in the most-recent quarter, I would assume that that would be ramping sequentially over the next several quarters as the customers bring those products in house.

Normally, high-end products like that carry higher margins and certainly software carries your highest margin, so can you talk a little bit about why we would expect gross margins to be anything but up and to the right.

Yes.

I think -- as we talk about, too, not only the benefits from the products, which is mainly more software, our products, even if the introduction of this high-end still carries pretty consistent gross margins with the rest of our product line.

But we continue with moving our builds offshore to China, which is providing benefit for us and we continue with our gross margin focus, the gross margin task force looking at supply chain, discounting, all areas that we want to affect positively.

And we look for it to strengthen, definitely.

But what we do say is what we're looking to do is leverage that back into the channel to drive top end.

So if we look over the last year, yes, we've definitely seen it go up and increase.

We'll talk next quarter about what we think for fiscal 2011.

But the trends are positive, it's how we leverage that back into the business and we'll talk about that more next quarter.

Okay, one last question off of that comment, then.

So is there -- now that you're finally get some traction in the file virtualization segment, if that product line is becoming successful with little less attention to it, are you guys so busy with what you're doing that you're not really able to look at small, tuck-in acquisitions?

These numbers are pretty amazing to be managing.

I would assume that you're probably less likely to do transactions?

Yes, and it's the same answer as it's been in previous quarters regarding acquisitions.

We're always looking, we get approached often, but we do have a very strong product roadmap that's an organic roadmap.

So we never discount it, but we are very focused on a strong roadmap.

Great, thanks for the time.

Great quarter.

Thank you.

Our next question comes from Jeff Lubert, please states your company.

Wells Fargo Securities.

Thank you for taking my question, guys.

Couple questions here.

First, you mentioned you saw a number of large transactions in the period, could you give us a sense of what verticals and geographies these deals are taking place in and size wise do, any of these deals compare to the big consolidation deal we saw earlier in the year?

Hey, Jeff, this is Mark Anderson.

We really saw it across geographies.

Last quarter we had the largest deal in the history of Japan, a pretty significant, multimillion dollar deal.

But we still have the same thing in EMEA, APAC and the Americas with pretty significant quarter-over-quarter and year-over-year improvements in the metrics that we measure.

Things like the number of $200,000 deals, the $1 million-plus transactions, and the revenue associated with that.

So I think really strong, directionally-correct data that made us all feel really good.

Yes.

As Mark said, we actually strength at -- almost across the board, so if you look at the $200,000-plus transactions they've been going up, as well.

What we didn't do, by the way, we didn't see any deal even remotely close to the last one that we booked earlier, so there's no -- there was multimillion dollar deals, but it was in the single digit, mostly toward the low single digits of multimillion.

Just one more thing, Jess.

To put it in perspective, it was multiples of what we saw in that quarter with that single big deal.

Multiples in terms of the number of million dollar deals.

And then very robust sales guidance coming off the Q3 results, could you perhaps discuss the close rates and the guidance and how they compare to what you actually experienced this past quarter?

Yes, the close rates were pretty close to a normal scenario last quarter and that's the way they've been tracking over the last -- we talked -- when we saw the macro issues, which was the end of 2008, early 2009, we saw the close rate worsening and then around about April we started to see it getting better and it's just got consistently better.

So it was pretty close to normality last quarter, a high percentage [of it packed] the pipeline.

But in terms of the guidance, the close rates embedded in the guidance, they're consistent with what you've been seeing, or are they more conservative?

We tend to be realistic.

I don't like using words like conservative.

I think they're realistic.

And then last question.

US federal looks like it was down sequentially for the third consecutive quarter, can you discuss what drove the weak not there, and how do you expect this business to track going forward?

Any comments you can offer there I think would be helpful.

Thanks.

Yes, and that's actually kind of a rounding thing on the percentages.

And I'll also say that from a bookings perspective actually federal did okay against our expectations, given that it's Q3.

I think we've been pretty public saying that Q4 obviously is the fiscal year end for the government so we look at that to bode well for us.

And I think overall we feel really good about the vertical there.

We do.

The year-over-year numbers with federal are excellent and we think that's going to continue.

We've seen great year-over-year quarterly growth in federal.

And just to be a little more specific, the pipeline has been very strong.

And don't forget, I mentioned last November, in the last two years we've doubled the size of the team and the productivity metrics from the team are significantly better than they have been.

Thanks, again, guys, and congratulations on a great quarter.

Thank you.

Our next question comes from Brian Marshall.

Please state your company.

Hi, Gleacher & Company.

Thanks, guys, nice quarter.

With your revenue growing almost 50% year over year now, and I think this mark the fourth quarter in a row where your OpEx has actually grown at a slower rate sequentially than your revenue, and was wondering how sustainable is this going forward considering the fact that we are approaching pretty high growth opportunities here on the revenue side and how are you thinking about investing for the future?

Yes.

Andy, this is John, Andy may want to add to this.

But the biggest change in OpEx for us, we've said many times, is headcount.

I think we said last quarter that we're looking to hire between 80 and 100.

We were at the low end of that range.

I can assure you that's not linked to our confidence level.

In reality, what we found was that in sales and marketing, great success.

It's much more difficult in development so I put a lot of effort into that as we move into this quarter, as well.

So it really is -- it's hiring aggressively but without any compromise of quality of individuals.

So we're not going to compromise in quality, but we want to hire aggressively and that's really what you're seeing.

Okay.

John -- sorry, go ahead Andy.

No, I was just going to say, if you size up the guidance that we gave all the way through the income statement we anticipate it to be strong again this quarter and probably a continuing of that scenario.

And I'll reiterate the next column, which marks our Q4 call, the beginning of the fiscal year, we'll look at our business and the sustainability of that and what our plans are and comment more on it during that call.

Okay.

And with regards to a copious ARX line, I think we were expecting a little bit more growth there this quarter andI was wondering if you still feel pretty confident about getting to double-digits millions in terms of revenue for the September timeframe?

Yes, I knew we were going to get this question.

The initial bottom-up forecast indicates that the $10 million actually is going to be a stretch in Q4.

Not impossible, but probably a stretch, and we certainly haven't assumed $10 million in our guidance so we haven't done that.

Having said that it is possible.

What we are assuming a sequential increase in Q4 over Q3, so we do see progress continuing.

And frankly, the real issue for me is seeing momentum, especially in the pipeline as we look forward, and I think we're going to see that.

Most of the go-to-market deployment that we changed has been in North America and that's where we saw the improvement.

So the deal with it now is to push that forward globally and then -- so the real issue's momentum.

But we feel reasonable -- reasonably -- much more positive than last quarter that we think we can see that happening.

The other thing that's important is when we look at the roadmap -- I mentioned a couple of comments about it -- we feel very good about some of the stuff that we're coming out now with ARX.

The software-only version, which is, as I see, for the first half of next year, that could be very positive in terms of penetrating OEM opportunities.

We're also coming out with some real cost-reduced versions with much more higher performance, as well, which we think it'll leverage it.

So overall, it's still a long way to go, but we're seeing progress now.

John, just a last question as a follow up.

Is the real issue here that this business isn't ramping up a little bit quicker just due to heightened competition from the likes of NetApp and others, or is it --

No, it's actually not that.

In fact, we're seeing minimum competition generally and, in fact, we've been partnering in the field with a number of storage vendors quite successfully.

It's very deal driven, so sometimes we're competing, sometimes we're not.

It's not that.

We're definitely still suffering from the fact that BIG-IP, I've mentioned before, is in the must-have category of data centers.

ARX has a tremendous ROI but it's a push to say it's a must-have.

It really is.

It's still something that you can delay.

But the ROI's still positive and I think that once we get this go-to-market momentum going even -- once we get more momentum with it, you're going to see more success.

Okay, and I guess one final question.

I apologize, this is the final one.

With regards to breaking even that business, is that -- still thinking double digits there gets you close to that level, or have you made any changes there that you can speak of?

Thanks.

No, there's really no change there.

It's a focus for us.

I think as we look at investments, we consider them very carefully in that ARX area, but it's our goal to get that to break even.

Yes, I think we've proved as a company that we can produce great profits and great operating margins.

Clearly, with ARX we're not anywhere near that, but that's very much our focus to get that in line.

Thank you.

Your next question comes from Ittai Kidron.

Please state your company.

Oppenheimer.

Hi, guys, congratulations on a great quarter.

Andy, not trying to be a pig here, but your guidance seems very low relative to historical trends -- sequential trends.

In the past you used to do between 9% to 12% sequentially, June to September, and now your mid-point is kind of 5.5%.

What am I missing here with regards to your sequential expectations into September?

Hi, this is John, I'm going to take Andy off the hook on this one.

As far as the guidance is concerned you're going to get the same answer.

We basically look at the bottoms up, we look at the pipeline, we try to be realistic.

Clearly, if we can exceed that, great, and there's no difference this quarter.

Yes.

But nonetheless, what is it that in the trend -- in the seasonal or customer profile trends that you're seeing, why would your expectation for next quarter be any different than it's been in the previous years, excluding 2008, of course?

As I say, we've taken bottoms-up forecast, we've added our own due to that and we've come out with the number.

Yes.

In fairness, Ittai, I think you're going pretty far back to grab those percentages.

I think if you look in the most -- even 2008 aside, the last three, four years, we've kind of been -- our aggressiveness has been more 4% to 6% and I think this is a little better than that.

Okay.

And, Andy, going into there year you've made an effort to try and make us think about how March and June can look like.

There were some regional trends and if I'm not mistaken government, as well, which made for a strong September and then some seasonality into the December-March.

This time you didn't bother going through it so should I take that to mean that you expect continued sequential growth into the first half of your next fiscal year?

Usually when we comment on that it's in our October call when we kind of look out to give general guidance of our view of the year, and I don't think we'll change from that.

But I don't think we've updated that much on the quarterly basis.

No.

So in October we'll give the prospective metrics.

Very good.

Good luck, guys, congratulations.

Thank you.

Thanks.

Our next question comes from Min Park.

Your line is open.

Please state your company.

Great.

Min Park from Goldman Sachs.

Thank you for taking the questions.

First, just curious, if you look at the systems that you sold into your existing install base this quarter, can you just give us a sense of what percentage were deployed for replacement or consolidations of existing F5 systems versus new deployments within them?

That's a hard metric to come one, actually.

It's interesting, we just completed the detailed reviews in North America, which is more than half our business.

What we did here is -- we didn't hear much of that, to be frank, but what we did here was a lot of competitive replacements.

That's still very much ongoing.

That's a major thing that we see.

That and obviously new architectural changes.

We bid a significant number, sometimes multimillion dollar deals of competitive replacement.

Okay.

And then --

Min, it's Mark Anderson here.

We also saw the percentage of our business from new customers go up and we saw quite a substantial number of new customer deals that -- really record volumes of new customer deals we did.

So it represented either quarter over quarter or year on year, again, pretty (inaudible).

And the feeling from the team is very positive to new customer acquisition.

Okay.

And of those new customers, how much of it's more competitor displacement versus brand-new buildouts of data centers or new developments of the technology?

I would say close to 100%.

We're seeing -- with our win rate in the mid-90s percentagewise, we're seeing our competitors be either distracted or focused on other things.

And so we go head to head and do a complete architectural review with our focused sales team and our world-class technology and it's -- I'm not going to say it's easy, but it's definitely something that we -- we're very successful at.

And then -- this is Dan.

You can see that reflected, too, in some of the market share information that's coming out, so -- has come out.

In the prior quarter we gained about 4.5% market share out there and really we're driving the growth in the market, as well.

The market grew at a rate lower than that, which we think is indicative of our technology being able to be used in places where competitors simply cannot.

So back to answer your original question, is it displacement of our own stuff, or competitor stuff, or brand new places, we're seeing a very healthy quantity of business going into brand new deployments where there's nothing like our technology that is (inaudible).

Great.

Thank you very much.

Our next question comes from Brian Lodge.

Please states your company.

Yes, (inaudible).

This is Vijay calling on behalf of Brian, Deutsche Bank.

Hi.

Yes, hi, John.

Hi, Andy.

Question for you, if you look into the back half what would be upside to consensus view?

Would it be increasing deployment activity with the telcos (inaudible)?

Would it be the higher end, the multi-cluster platforms and big data centers?

Any view on the margin in terms of what do you think would be upside to consensus view?

Yes, we don't tend to comment on consensus views, as such, but in terms of looking at upside, it's a number of things.

We are hiring aggressively in sales, so any increase in sales productivity, especially with entry level, has definitely got some opportunity.

I think there's opportunities, as I mentioned, in terms of expanding in geographies and vertical markets.

It's really pretty much across the board.

But at the end of the day when you get to these types of numbers, I think it's more of an execution, so good sales productivity, I think, is where we see the upside.

This whole concept about moving direct touch, which we did (inaudible), Mark's been doing it now in Japan.

We're seeing bigger and bigger deals coming across the board in North America.

I wouldn't -- I'm not going to call out anything specific., there's a number of opportunities.

And, Vi --

Sorry.

Go ahead.

And Vijay, we're also investing in partner enablement and partner accreditation, so we're seeing -- we're very motivated to get the leverage we can get from the partnerships that we've evolved to be viable to us.

It's big systems integrators, big telcos that are learning that it's not really all about the network anymore, it's about applications and that's our sweet spot.

So we're spending money training these folks to go out there and be an extension of our sales force and be more productive than they have in the past.

Just a quick follow on.

You mentioned a very insightful point that the software virtualized appliance potentially seeing OEM opportunities.

Any color on that?

That's a very intriguing point you made.

On ARX specifically?

Just across the board.

When you have more of the software, the virtualized form factor, potentially it can have OEM opportunities.

Any thoughts on that (inaudible) across the board.

That's correct.

And in fact, I mentioned it in my script for the ARX.

You're right.

If you look at the FirePass product and we know that introduced a virtual solution, there's opportunities for OEM there.

And in terms of the virtualization for BIG-IP, we've seen a very, very strong interest level in terms of downloads.

We haven't been giving out the numbers, but it's a very significant number of downloads.

Interestingly enough, a lot of that has created business for the appliances and so developers looking at BIT-IP from a software perspective, seeing how they can develop iRules to optimization their applications and they're actually going ahead and buying appliances.

So I think overall it's a very good opportunity.

It's also an opportunity in the smaller markets, the SMB-type opportunity, as well.

So yes, it's -- this is at the beginning (inaudible), this is really at the beginning.

I think for ARX it could be very significant but we'll see.

Yes, perfect.

Thanks, John, and best wishes for the rest of the years.

Thank you.

Our next question comes from Jason Ader.

Please state your company name.

Yes, William Blair.

Hey, guys, I have a couple of questions that came just off of other calls that have been talked about, which weakness in the US fed and weakness in Europe, just in terms of demand for tech.

And that's the first question and maybe you can provide some comments?

And then secondly, could you give us an update on the HP relationship?

Yes.

On EMEA and fed and EMEA, first of all, obviously there's so much information (inaudible) to the macro environment that you can't ignore that, but we're not seeing it.

We're seeing a strong EMEA, a strong pipeline.

Obviously, seasonally this is always a tough area, especially July-August.

Typically there's some seasonal issues there, but we're not really seeing that.

So, yes, we feel good about the opportunity.

We do have -- only the low 20% of our business is EMEA so we think there's great opportunity moving forward.

We've not seen any change in discounts in EMEA either.

There's just no sign of weakness.

I'm always cautious to be as bullish as that but that's what we're seeing right now.

In terms of fed, we're expecting a pretty strong federal final quarter mark.

Said it earlier, Jason, in one of the other questions that the pipeline is very strong with big projects.

So again, we feel pretty good about that.

And HP?

Yes, HP -- the relationship with HP is strong, it's progressing.

It's similar to a relationship with some of our other partners, like Dell.

It's pretty important.

I don't know, Dan, if you want to comment.

Yes, sure.

So Jason, we've had a couple of things progressing in different parts of HP, so specifically their NFS group that restyles the different types of products, we've had lots of discussions with them.

We're seeing more progress going through that group so that's been great.

So there we'll see them roll things out across regions around the world.

And then as well with their EDS group, the EDS acquisition, just seeing continued growth there, improvement in the relationship.

We're part of a vendor management program that they've got there, which is a really good thing to be part of and we expect good things from it over time.

And they continue to be a very good customer, as well.

Thank you.

Our next question comes from Brian White.

Please state your company.

Ticonderoga.

Hi, John.

When we look at the phase that we're in data center consolidation virtualization and the move to cloud computing, do you feel, unlike 2008, that the secular trends are more advanced now that even if we see a slowdown in the economy -- a further slowdown that it's not going to disrupt your business?

I don't think you can see that.

If you see major macro trends like we did -- we saw in December 2008 and then early 2009, we did see a slowdown.

But as I've said in previous calls, the thing that gave us a massive confidence as we -- it was really (inaudible) pause.

As soon as that pause of a few months was over, we started to see the business accelerating and that's been happening for some time now.

So I feel very, very good at where we sit in the pecking order of spending, on technology spending.

I think we're extremely high up there and we've been saying that we really think now that application delivery controllers in a data center are really a must-have.

So I'm not discouraging the macro environment, you could see a pause for a quarter, but I don't think it would last long.

Okay, great.

And just on the verticals, it sounds like the federal will pick up at year end here.

Do you think the financial and telecom verticals will continue to grow sequentially into the September quarter?

They had great June quarters, do you think that will continue?

Now we don't tend to talk about that to that level of growth.

The other thing to remember is that we are reporting revenue with the financials and the bookings are very strong (inaudible).

But we haven't actually seen any significant sway in percentage between telco, finance, and technology and fed.

Fed's been growing, but the percentage of technology, financial, and telco have been pretty similar.

In other words, they've been growing as the rest of the companies been growing.

Okay, great.

Thank you.

I don't know if that makes sense.

Great, thank you.

Our next question comes from Nikos Theosopoulos.

Please state your company.

Yes, it's UBS.

I had two questions, one just a number question.

I heard you comment, but I didn't hear the percentages, if you have them, on percentage of business from new versus install customers?

And then the second question is, on the mobile data part of your business, is there a way to quantify that a little bit more in terms of how much of it is what percentage of sales and how global the nature of that business is?

Is it only US centric, is it global, can you put some color around that?

Thank you.

Let me give the latter, and then Andy can talk about the percentage you asked for.

It's absolutely global, there's no question about that.

It's global.(LAUGHTER) It's (inaudible) in all major region.

We -- most of our business, though, in service provider is mobile oriented.

So we don't say how much, but most of it.

Last quarter we talked about some of the deals.

We won multimillion dollar deals again last quarter in a mobile -- for a mobile application, so it's a very strong driver for us.

Yes.

And then the breakdown on new business versus existing business.

29% was new business this quarter, and so 71% existing, and that compares last quarter the new business was 27%.

So as Mark said, we are seeing a pickup in the area of new business.

Okay, just a follow up on the mobile piece.

Are you winning that business direct with the customers, are you winning it through partners?

What's your ongoing sales strategy for service providers to leverage what you've already accomplished there?

Yes, a lot of it's partner driven.

Some of it -- when you say direct, we tend to do -- touch the customer and touch the sale, so we have a pretty strong direct touch with the telco, the service provider market.

We have a dedicated service provider team that does that and sometimes we're working very closely with the partners, sometimes the partners do a lot of the business themselves.

Great, thank you.

Okay, Sarah, this is John Eldridge, we're going to take one more call, and then we're going to wrap it up.

Thank you.

Our last question comes from Brent Bracelin.

Please state your company.

Pacific Crest Securities.

Thanks for sneaking me under the wire here.

Just a couple of questions.

On the telco (inaudible) side, that's been bouncing around the same level on an aggregate basis for the last four or five quarters.

You had a pretty robust surge this quarter, what drove that?

And as you look at the pipeline, how does the specific telco (inaudible) vertical look going into the second half?

Yes, as John said on the previous caller, that -- across our main verticals, the financial, telco, and technology, we've seen that be pretty consistent, all of them growing with our overall revenue.

I think this quarter, if you go back to our last call, we had commented a little bit on bookings and that it was our expectation that we'd see it be stronger this quarter just because of the -- how bookings we saw them -- not bookings, I'm sorry -- yes, bookings and backlog rolling out and we saw this happen.

Our overall bookings were actually pretty consistent.

And we're putting focus on it, but we think all areas of our business have opportunity to grow, so we're just -- we're more focused that way.

Okay, fair enough.

And on the competitive replacement side, you talked about multimillion dollar opportunity there, talking about more -- seems like more competitive replacements than you have in the past.

Is that largely foundry opportunities, Nortel Alteon opportunities, Cisco ArrowPoint opportunities?

When you go in and are seeing these large replacements, is it concentrated with one competitor, or is it across the board?

It's very much across the board.

Obviously, that -- some of the names you mentioned have bigger market shares than others and the ones that tend to have the bigger market share tend to get the most percentage of replacements.

But it's pretty much across the board.

Okay, fair enough.

My last question, John, you did, in your comments, talk about some newer, lower-priced [vibrion] products coming to market, some new lower mid-range systems, is there a part of the market that maybe you're not fully addressing today that you plan to have some of these new products go after, or help us understand the logic behind some of the new platforms you'll be coming out with later this year?

Yes.

And really, Brent, we'll talk about that in a lot of detail in the analyst investor day.

We haven't -- I don't think we've given the date yet, but it's going to be November is where we're planning that and we'll go through the roadmap in a lot of detail.

But fundamentally, these new products make it much more competitive than what's been before and we're very competitive right now.

So we continue technology leadership.

The very fact of the architecture means the ability to run more and more modules, so add more and more solutions to the solution.

In terms of where we're going -- where we're not focused, obviously we don't do much business in the small and medium business and they're not really focused on that so it's not an extension there.

We do think that there's an opportunity with virtual version and obviously with the cloud opportunities, as well, but it's really about just pushing that technology, pushing a new architecture, having a barrier to entry now that competitors just can't match, it's that.

Okay, fair enough.

So it sounds like you're trying to maybe potentially expand the addressable market but it's not like this is going to be a move down market?

That's correct.

Okay, great.

Thank you.

Okay.

Thank you, again, for joining us for our third-quarter conference call.

We look forward to talking with all of you throughout this coming quarter.

That does conclude today's conference.

Thank you all for participating, you may disconnect at this time.