F5 Inc (FFIV) 2011 Q1 法說會逐字稿

I'd like to thank all participants for holding and good afternoon and welcome to the F5 first quarter financial results conference call.

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

Also today's conference is being recorded.

If anyone has any objections please disconnect at this time.

I'd now like to turn the call over to 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 2011.

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

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

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

If you don't have a copy of today's press release, you can access one at 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In addition you can access an archived version of today's live webcast from the Events Calendar page of our website through April 20 from 4.30 PM today until midnight Pacific Time, January 20.

You can also listen to a telephone replay at 800-934-9421 or 203-369-3391.

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.

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

Thank you, John.

In the first quarter of fiscal 2011, F5 achieved strong revenue growth and operating results reflecting another quarter of solid execution.

Revenue of $268.9 million increased 41% year-over-year and was within our guided range of $265 million to 270 million.

GAAP EPS of $0.68 per diluted share was above our guided range of $0.62 to $0.64.

Excluding stock-based compensation expense, non-GAAP EPS of $0.88 per diluted share was also above our guidance of $0.80 to $0.82.

Both GAAP and non-GAAP EPS results reflect a benefit of approximately $0.04 related to the reinstatement of the R&D tax credit.

Product revenue of $171.5 million grew 44% year-over-year and represented 64% of total revenue.

Service revenue of $97.4 million grew 35% year-over-year and accounted for 36% of total revenue.

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

By region, the Americas represented 59% of revenue.

EMEA accounted for 22%, APAC 13% and Japan 6%.

Revenue from our core Application Delivery Networking business was $261.7 million.

As a reminder we are now including FirePass product as a component of our ADN revenue results.

Revenue from our ARX file virtualization products was $7.2 million, essentially flat with the prior quarter and up 27% year-over-year.

During Q1, the financial vertical accounted for 19% of sales, telco was 21%, and technology was also 21%.

Total government was 12%, including 7% from US Federal.

In Q1, we had one greater than 10% distributor, Avnet which represented 18.8% of total revenue.

Moving down the Income Statement.

GAAP gross margin in Q1 was 81.8%.

Excluding approximately $2.2 million of stock-based compensation expense, non-GAAP gross margin was 82.6%.

GAAP operating expenses of $140.1 million were within our target range of $137 million to $141 million.

Excluding $20.7 million of stock-based compensation expense, non-GAAP operating expenses were $119.4 million.

GAAP operating margin was 29.7%.

Non-GAAP operating margin which excludes stock-based compensation was 38.2%.

Our GAAP effective tax rate was 32.4%.

Excluding stock-based compensation, our non-GAAP effective tax rate was 31.5%.

These rates were lower than our guidance of 36.5% for GAAP and 35% for non-GAAP due to the reinstatement of the federal R&D tax credit.

The Q1 rates reflect both the tax benefit on Q1 as well as the retroactive impact of the R&D tax credit applied to quarters two, three, and four of fiscal 2010.

On the balance sheet, cash flow from operations was $103.1 million contributing to total cash and investments of $952.3 million at quarter end.

DSO at the end of Q1 was 48 days.

Inventories at quarter end were $18.2 million.

Deferred revenue increased 11% sequentially to $287.8 million.

Capital expenditures for the quarter were $5.5 million and depreciation and amortization expense was $5.3 million.

We ended the quarter with approximately 2,130 employees, an increase of 120 from the prior quarter.

During the quarter, we repurchased approximately 198,000 shares of our common stock at an average price of $126.43 per share for a total of $25 million.

Approximately $213 million remains authorized under the current share repurchase programs.

Looking ahead to Q2, we see our core drivers continuing to generate significant growth opportunity going forward and we anticipate continued momentum in Q2 and through the remainder of the year.

For the current quarter, we are targeting revenue in the range of $275 million to $280 million.

We expect GAAP gross margin in the 81% to 82% range, including approximately $2 million of stock-based compensation expense.

We anticipate GAAP operating expenses in the range of $142 million to $146 million.

This includes approximately $20 million of stock-based compensation expense.

Our GAAP EPS target is $0.65 to $0.67 per diluted share.

Excluding stock compensation, our non-GAAP EPS target is $0.84 to $0.86 per diluted share.

We are forecasting an effective tax rate of 36%.

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

We plan to increase our headcount by more than 125 employees in the current quarter.

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

We expect inventory levels in a range of $17 million to $19 million and we believe our cash flow from operations will be in excess of $90 million which includes the impact of two large tax payments due in Q2 per our normal tax payments schedule.

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

Thanks, Andy, and good afternoon, everyone.

The F5 team delivered another set of solid results in the first quarter of fiscal 2011.

All our major geographic regions produced strong year-over-year and quarterly sequential revenue growth.

The start of the quarter was the Asia Pacific region which produced over 60% year-over-year growth.

Japan's growth over last year was just under 35% and the Americas' growth was over 40%.

The EMEA region which delivered a very strong quarter in Q1 last year was up 29% from a year ago.

Once again, our services business produced [stellar] results, 35% year-over-year services growth and 9% sequential growth combined with a 36% year-over-year increase to deferred revenue, all point to future services revenue growth throughout fiscal 2011.

As Andy indicated, our overall financial metrics are very strong in Q1.

Cash from operations was at an all-time high of $103 million and our non-GAAP operating margin was above 38%.

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

We had very strong sales of our flagship VIPRION product line last quarter.

Sales of our Application Security Module, ASM, were also very solid as customers around the world focused more attention and resources on security at the application level.

Sales of Edge, our next generation remote access offering, APM, our optimized Access Policy Management solution and our WAN optimization module continued to generate significant interest from our customer base.

We believe this interest will translate into significant revenue growth for these exciting solutions throughout the year.

Q1 revenue from our ARX file virtualization product line was essentially flat over last quarter and was below our internal expectations.

Towards the end of last quarter we had a number of forecasted deals pushed out into Q2 and we expect to see improvement and sequential growth in ARX sales this coming quarter.

Last quarter, we announced some very important products to supplement ARX product family.

The ARX Cloud Extender is an add-on to ARX and significantly expands our existing filed tiering solutions by allowing customers to intelligently tier to the cloud.

We announced support for the intelligent tiering of files to Amazon S3 cloud services as well as natively supporting Iron Mountain's VFS, and NetApp's StorageGRID solutions.

We expect to have similar support for other major cloud storage services throughout the year.

We are also developing a software-only version of ARX, the ARX Virtual Edition.

ARX VE should promote an increase in proof of concept trials for our ARX products as well as providing the opportunity to enlist more strategic partners for this software-only solution.

We are also on track to release two new mid-range platforms, the ARX 1500 and the ARX 2500 both of which are exceeding our performance expectations.

Overall, we have made good progress with the product road map and expect to deliver some very significant products to market this year.

We expect to begin beta tests this quarter on our Victoria project.

Victoria marks the introduction of VIPRION chassis capabilities into the mid-range of our product line.

TMOS version 11 is also expected to transition to beta testing where we will begin to validate in customer environments a number of new features including Virtual Clustered Multiprocessing, VCMP, a new module on the visibility of application performance, AVR, a new generation version of our application templates that provide a new management tier to scale and manage applications called iApp, as well as a sophisticated range of clustered management capabilities.

These exciting new features will allow F5 customers to implement, manage, optimize and expand large scale data centers by leveraging cloud-based architectures and virtualization.

TMOS version 11 will introduce the virtualization of our ASM and GTM product.

V11 also includes a number of new features targeted at the mobile and service provider markets such as additional support for IPv6 and new service provider-oriented, iRules.

In addition, we plan to release the next versions of the BIG-IP 1150 and the VIPRION PB200 blades.

As far as the outlook is concerned I feel very optimistic about our business prospects for the remainder of fiscal 2011.

As we stated at the beginning of the fiscal year, we expect to deliver sequential growth in each quarter of fiscal 2011.

We enter Q2 with a robust pipeline of future business which continues to grow and includes a number of multi-million dollar opportunities.

In addition, we have made significant investments in growing our sales team headcount which should produce productivity gains as we progress throughout the year.

The market growth drivers for our business remain very much intact and includes continued increase in storage requirements, global data center consolidation projects, growth in mobile data and mobile applications and increasing awareness of the importance and need for application security and secured policy driven accessibility, and the evolving opportunity with closed architecture solutions.

Also, we are seeing continued growth opportunities associated with virtualization and F5 is increasingly being recognized as a de facto ADC solution for virtualization initiatives.

F5 solutions occupies 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 of partners and customers for the support last quarter and with that, we'll now hand the call over for Q&A.

(Operator Instructions) The first question is from Jess Lubert.

Thank you, sir.

Your line is open.

Thank you for taking my question.

Can you discuss linearity in the quarter and perhaps how business unfolded relative to expectations, were there any areas that surprised you?

I guess either to the upside or downside and specifically whether or not there was any weakness towards the end of the quarter?

And I think that would be helpful.

Yes, this is John.

We did see some slight differences in linearity and let me just go through that.

In terms of obviously surprises, I mean we did mention the ARX was flat and that was with deals that happened towards the end of the quarter but we do expect those to close and to see some sequential growth.

In terms of the bigger picture with the ADC revenue, we did see some disparity in October especially in the last week of the month of October which was much lower than normal - than we would normally see and November and December were pretty much on track for what we tend to expect.

So although we saw some deals slip, frankly it wasn't significantly beyond what we would normally expect and that -- the beginning of October, the last week in October month, we thought we would catch up maybe with some budget flush but that didn't happen.

Can you maybe provide any insight into what verticals where you saw some of that business starting to slip?

Looks like service provider was down sequentially.

Were there any specific verticals where you saw it or was it more broad based?

No, more broad based.

The service provider down is quite common from a seasonality perspective, given that the networks are closed down for the holiday period.

You quite often see that, similarly with federal you see that down after the September year-end so not really, no.

So it would be right to think that the service provider vertical would increase sequentially next quarter and through the remainder of the year?

That's what we typically see.

We don't get through the verticals in terms of forecasting but that's what we typically see.

All right.

Thanks, guys.

Next question is from Mark Sue.

Your line is open.

Thank you.

John, maybe if you could just give us further color on what we should read into the lack of budget flush and why there was no pickup in the business?

Do you think it's because a lot of the projects were completed earlier on in the year?

Was it because a lot of the data centers were already being built or maybe just thoughts, why is this not as important as before when it comes to ADC?

We saw some -- we did see budget flush, but it was mixed, but before we get too defensive here, we have obviously seen the reaction after hours of the [stop].

Before we get too defensive, let's just remind ourselves we were at the top of our guidance range, very much the top, greater than 40% revenue growth, cash from Ops greater than $100 million, operating margin greater than 38% and they are record numbers for us.

But in terms of budget flush, we probably did expect to see some more but we did see some, so it wasn't like it was completely minimal.

And so but from your comments it was a weak finish to October, you had your Analyst Day in mid-November, you had some but not enough.

Is that how we should read it?

Yes, exactly.

So with a book-to-bill less than 1, doesn't it feel like a stretch to grow revenue sequentially $275 million to $280 million?

You have seasonality to contend with.

Are you just sticking it out there because that's what you said at your Analyst Day or do you feel that you could actually --

Absolutely not.

Absolutely not.

We use the same tried and tested methodology for the forecast and we get the bottoms up forecast from sales, the analysis of the pipeline, especially the [Acopia] pipeline that we talked about, we look at the assumed close rates, we do detailed face to face sales review with sales management.

The guidance frankly is pretty similar to a year ago in Q2 a year ago in terms of the sequential percentage.

We think it's realistic and hopefully conservative.

And with the stock down $30, any thoughts on a buyback?

We'll more than likely be continuing with buyback.

We have that decision we make quarterly so you should expect to see that continuing.

Thanks, gentlemen.

The next question is from Troy Jensen.

Your line is open.

A quick one for John.

ARX several quarters of not hitting your revenue targets, operating margins likely below zero here.

Now is there a timeline where you may make a more strategic decision on what to do with ARX?

Not really.

We are pretty committed to ARX, and by the way, you see several quarters, Troy.

The last two quarters we're actually happy and we -- I think during the quarter, you did hear me with some optimism about ARX, so we did see the [slipped] deals but we do expect to gather some steam in this current quarter.

And then a quick one for Andy.

I think Andy you'd said for the year, you're targeting operating margins at 36% to 38%, Q1 here you guys are already above that.

It seemed like you guys are consistently pushing this message about investing after revenues, so what's your thoughts on that range now?

Yes, that -- investing behind revenue is still our mode of operation and when you pencil out our guidance, you'll see that we're at the upper end of that range for Q2 as well.

Our view on it now and I guess you could consider this an update as we think we'll be above 37% definitely through the rest of the year so taking that up a little bit.

Good to hear.

Okay guys, good luck.

Next question from Paul Silverstein, your line is open.

Andy and John, on the government piece, it looks like US Federal was up about $1 million and so the rest of your government business was up a couple million dollars.

Is the bulk of the balance of that state and local?

How much of that is foreign and how much of that is US state and local?

I'd say most of the other government is foreign.

Our state and local for us is pretty small.

So but you're not seeing -- government clearly is strong for you guys in general?

I wouldn't categorize it as strong-- typically is September quarter is the strongest.

I would categorize it as normal.

John, I'm looking at it up 40% year-over-year.

In federal?

Well, government in general.

No, then that's correct.

And the same for federal so the year-over-year perspective, we're very happy with it.

In terms of your new service provider product offerings, I know you just launched that recently.

Any insight you can share with us in terms of what you're seeing?

Well that's early days.

As I said earlier, that telco was above in that 20% to 25% range we tend to but it was obviously at the lower end of that range in December, but that's not abnormal for the telco vertical.

And in terms of new products, a number of stuff that's coming with version 11 that's moving into beta.

So it's just too early to contemplate the impact?

Oh, yes, absolutely.

It's not included in any of the guidance that we've got for this quarter.

I'll pass it on, thank you.

Next question from Brian White.

Your line is open.

I'm wondering, John, if you could talk a little bit about how January is tracking and also the competitive landscape, has there been any change at all?

We wouldn't normally -- January is tracking sort of normally.

Frankly, the way our business works is that we really focus very much weekly but typically it's always the last week in a month that's important that's why I called out the last week in the October month that was abnormally low for us.

And we've never really seen it that low before and then it normalized in November, so we would expect the same in January.

And we would expect a normal not a low but back to normality as we saw in November and December.

And is there any change at all in the competitive landscape, is anyone getting more competitive?

Not at all.

We spent about four hours yesterday with the North American sales management.

We don't see any change in the competitive environment.

We think we're incredibly well placed competitively.

Just finally, I mean it's obviously a fine quarter but usually you deliver a little more upside and obviously in the outlook so if you had to pin one reason for why things aren't maybe as robust as they were in the quarters before, what would you highlight?

Well, I think that trying to catch up in October definitely was appropriate.

We did see not as many large deals last quarter as we would normally see, but our pipeline of large deals is pretty significant in this current quarter, so we don't see anything systemic.

We think we're going to have a pretty solid continuance of large deals and that will also involve the second half of the year.

Okay, great.

Thank you.

Okay.

Your next question from Nikos Theodosopoulos.

Your line is open.

Thank you.

A couple of questions.

On the headcount additions, I believe in the last couple of quarters, you've been adding about 5% to 6% incremental headcount and that seems to be the case also for the March quarter.

Do you think that, that percentage is going to continue or do you see with the in line guidance and the guidance next quarter that you might want to slow the headcount additions to keep the operating margin stable?

How do you plan on managing both of those?

Yes, I think we plan to continue hiring aggressively, so and we've been saying that for a while and in my script I said for this quarter about 125, so we're going to keep pushing that.

In terms of managing that against operating margin, that's what we do on a continuous basis, watching our revenue, managing it as we go, and we'll continue to do that.

I think I'm confident we can do both.

And frankly, the challenge for us has been hiring, because we don't compromise in people.

We've been very successful in sales and service and to some degree in marketing, but Andy is really tough.

We're very, very choosy, very picky in terms of the quality, so our mindset is not about limiting.

It's the opposite.

Okay, and just the second question.

I think you said that the average deal size declined from the September quarter.

First of all, just so you can confirm that, and then how do I reconcile the deal size coming down was a book-to-bill -- I'm sorry, the pipeline of deal size improving but the book-to-bill below 1.

Can you give some color on those moving parts?

They aren't really contradictory.

What we did say is we actually saw less larger deals in the quarter but when you look at the pipeline of the business that we expect and especially the [Acopia] pipeline that's the business that we expect to close in the current quarter, the number of large multi-million dollar deals has gone up.

Okay, so maybe then just before the December quarter, what was the trend in the average deal size?

Did it go up or down or flat from September?

Yes, it went down and linked to the fact that we had less larger deals.

Okay, got it.

Thank you.

Next question is from Brian Marshall.

Your line is open.

Hi, thank you guys.

A question with regards to the telco vertical.

I mean if you look at it, we were on a very strong pattern in June and September and had a little hiccup this last quarter.

I guess going forward, do you really expect this to be just a seasonal thing, i.e., it should really start to get back on the track we saw in the June and September time frame with a ramp perspective or do you think this going to be a little bit more of a period of gestation if you will?

No, we think it's going to be a seasonal thing actually because interestingly enough, if you look at last year it was 21% as well, so very similar to a year ago when networks closed down and I indicated that we do expect to see momentum in this current quarter.

Okay, so I guess going forward you'd expect the total mix from telco service providers to start to get back to where we were in that June and September time frame over the next several quarters?

We'll obviously give more specific guidance when we move beyond this current quarter but I don't see any change that's happened that would make me think otherwise.

Okay, and then if you look at the last probably six quarters on average I guess you've added about $15 million sequentially of incremental revenue and then we did have those two outliers in June and September.

Do you think that they, if we exclude those outliers that that's kind of the steady state of business that F5 is currently on today going forward?

Yes, I said earlier.

When we look at the pipeline and we look at our win rates and competitive position, all that stuff, the [Acopia] pipeline, close rate percentages that we're assuming, we do think that we're going to have a very good second half.

What we have discussed is that as the Company is getting larger, we have seen some seasonality after Q4 and we'll investigate that further and talk about it more as we get nearer Q1 2012 but our current feeling is we probably do.

Seasonality after September 11, so i.e., December 2011?

Yes.

Okay, thank you.

Appreciate it.

Thank you.

Our next question comes from Ittai Kidron.

Your line is open.

Thanks.

Want to drill back again into Acopia, John.

I can't even count the number of quarters you've set targets for this and you never seem to be able to get there.

When you do a root cause on this, what do you think is the issue?

Where do you think you guys are not evaluating wrong -- correctly or not executing correctly on this?

Yes, I mean definitely, there's no question that it seems to be easier for customers to delay decisions on the ARX.

We've said that a number of times, but the other side of that coin is when we did some of the reviews of the forecast deals for ARX this current quarter, the names, the Fortune 50 names that are on the list is really impressive, so there's definitely frustration here internally about we're winning some real quality names and we're winning some great projects.

But we're still working on that scalability happening within the business, and we're going to keep at it until we get it.

Well but it seems like the valuation process is extremely long and therefore, why be so optimistic on it?

I mean, it could be that they're just -- well maybe not really interested it, right?

They are just evaluating for long and it doesn't seem like it's delivering or going to give them the benefit that you think it's going to give them and thus, they're not really pulling the trigger on it all that quickly.

Yes, because remember we're doing a lot of things at the same time as we're doing that.

We've introduced a virtualization version, we think that's going to have an effect.

We've introduced Cloud Extender, there's going to be two new much, much faster massive price performance, actual products coming along so it's not like we're standing still, hitting the same brick wall.

We are advancing as we're doing that, but you can't deny that we haven't produced the goods yet.

A couple more things, Andy.

On the DSO, significant increase there, if you could explain that and also the financial vertical on a year-over-year basis, last year in this quarter, it was about 31% of your revenue, now only 19%, a significant shrinkage from a contribution standpoint.

Is there anything we should -- how should we interpret that I guess?

So on the DSO, John alluded to the slow start we had in October and that affected our collections and drove up the DSO there to the 48 level, but what I'd say is when we look at our accounts receivable, I wouldn't take away anything from that in terms of the quality of the deals or collection issues.

It's all current.

It's all clean, so that's good.

When we look at the -- on your second question, Ittai, the financial vertical, so a year ago if you remember we had a large financial deal in our Q4 that we didn't ship out and we actually ended up shipping out a fair amount of it.

I can't remember the exact percentage but a fair amount in our Q1 which took the financial vertical up to that 31%, so that's why you see that.

What appears to be a drop-off but from our perspective, the financial vertical is as strong for us as ever, nothing to read into that either, yes, that's it.

Very good.

Good luck, guys.

Next question comes from Jason Ader.

Your line is open.

Thanks, guys.

I guess I was just curious, John.

Do you think it's possible that because of your strong product cycle that you've had over the last 18 months and some of the pent-up demand coming out of the recession and also the urgency around data center build-outs that maybe some business normally would be in the latter part of the year came in earlier in the year?

And that's why you saw such incredible performance maybe in the June and September quarters maybe not as strong in December?

We looked at that but we don't think so and the reason we don't think so is the pipeline.

I mean, the pipeline is the strongest it's ever been going into this quarter, very, very strong.

De facto pipeline is very strong.

We think we've basically chosen some reasonably conservative closure rates in de facto pipeline in terms of our guidance and there's nothing for us to think that pipeline would increase going into the second half.

So if the pipeline was down, we would maybe go there but no, it's the opposite.

We clearly -- we've been beating the quarter and didn't last quarter but the key drivers are all in place.

So basically, your bottom line here is it's just seasonality?

Yes.

That's correct.

Okay.

Thanks.

Next question comes from Simona Jankowski.

Your line is open.

Hi, thanks so much.

Just wanted to see, unless I missed it, if you could comment on the percent of business that came from your customers this quarter versus from existing customers?

Yes, we haven't.

So the break down, new business it was 34% and that's up 2% from the prior quarter and obviously existing was 66%.

Okay, got it.

And as far as your book-to-bill below 1, can you give us a little bit of context for that as far as how normal is it for that to be below 1 in the December quarter?

Is it seasonal or is it an aberration and also maybe when was the last time when it was below 1?

Yes, I wouldn't say that for Q1 that, that's been consistent.

I think since the recession we're reshaping our view on that and I think John talked about the seasonality and that may be an outcome but it's a little early to call that.

I believe the last time that it was less than 1 was the March quarter of '09.

Okay, great.

Thank you very much.

Thank you.

Next question comes from Brian Modoff.

Your line is open.

I wonder if you can talk a little bit about some of the new products you have coming out, particularly Victoria and TMOS 11.0 and how do you see that affecting your demand trends as those products come into production?

Right, so yes, so as John mentioned in his script we're rolling out some new platforms.

We actually have some new NEBS hardware that will be showing up this year as well as the Victoria platform and actually Victoria will be rolling out in two versions.

It will be rolling out with a 10.2 release, 10.2x and also with our 11.0 software it will be available.

And then 11.0, we have some very significant service provider features including the ones that John talked about in his script, but things like significant enhancements for IPv6 support, some specific management features, (inaudible) features specifically targeted at our service provider customers especially in the mobile area, so Dan I don't know if you want to add to that?

Absolutely.

Brian, this is Dan.

The other thing too is with the Victoria platform itself, so first of all to set the stage, we've had multiple, multiple introductions of new hardware versions and better performance and things over the history of the Company so we're pretty good at managing those in and setting the right expectations with our customers.

So things like Osborne effect and stuff like that don't, we've been able to manage around those over time.

The Victoria piece in specific -- is really very cool, so it's taking a lot of the benefits that we get out of the VIPRION architecture so chassis-based, being able to add blades if you need more capacity and all of the high availability and scale for manipulation that you need and bringing that into the mid level of our product range.

And we believe that will be a significant differentiator for us, certainly within the enterprise compared to all of our competitors out there and we'll bring some very, very good things and bring more horsepower for a lot of the application level modules that we offer out there on the security side and acceleration side, so we're quite amped about it.

One thing I do want to add too is with our new software releases they do run on all of our existing shipping platforms so customers that have been purchasing platforms all along, this will be available to them as well, so there's no change there.

And then can you give us a little bit of the timing of Victoria, availability as well as TMOS 11.0?

Well as I said Brian, it's moving into beta and that means we are letting customers test it, letting customers give us feedback, that means it's very well advanced.

We haven't given a date yet and we won't until we're absolutely through the beta phase but typically when we give our products, especially products of this size into beta, it's very well baked so we're a long way forward with it.

For the next couple quarters?

We are a long way forward with the target.

And same with TMOS 11?

Oh, yes absolutely, that's moving into beta as well.

Thank you.

Brian, this John Eldridge.

We're going to take two more questions and then end the call, so let's move ahead.

Next question is from Rod Hall.

Your line is open.

Okay, yes.

Thanks for taking my questions.

So I just had a couple clarifications I guess.

One is John, you said that this October month was weak and then November and December okay, and then but you're only forecasting in this next quarter, the quarter we're kind of normal sequential improvement which I - it feels to me like it should be better than normal if October was just a blip.

So I wonder if you could just talk about what your thinking there is and also I wanted to follow-up on Brian's question on new products.

It does feel an awful lot like with the confidence you have in H2 there is some Osborne effect going on and so I just wonder if you could comment on the type of pipeline you think you got for H2.

Is it for these new products or is it just normal pipeline stuff that's going on, and lastly on DSOs, I just wonder, you guys said that Asia really drove the quarter.

Was that particular deal where you're not getting payment until later, was that an Asian deal and can you comment on whether further expansion in Asia you would expect DSOs to expand a little bit before they stabilize?

So those are my three questions.

On the second question, I'll leave the DSO for Andy but on the second question, we're absolutely convinced there's no Osborne issue going on.

We would see that very clearly when we talk to the salesforce.

We're just not seeing that and we don't expect to see it.

We've managed pretty well in that so I think that's absolutely a red herring to go down that way.

Regarding the guidance, well, as I said earlier, we use the same technique for guidance.

We've done a lot, put a lot of effort into it in the last couple of weeks, looking at the pipeline, analyzing it, the face to face meetings I've talked about.

We are assuming a book-to-bill equal to 1 on our guidance and we are assuming hopefully conservative close rate in the pipeline.

And in fact slightly reduced close rates from last quarter, which are in fact down from the previous three quarters so we'll see where that ends up, but I think our guidance is realistic.

And then to your question, just to your question on the DSOs and was that driven by a specific deal or geography?

Definitely not.

Really, it was more just -- I would use the term, "broad based" just in terms of a slower October made it more difficult to get collections in general but even at the mid-40s, 48 we still feel very good about our accounts receivable.

So we should expect those DSOs to drop back down again in this current quarter?

Well, we guided to mid-40s and yes, my general expectation would be for it to pull in a little bit.

And that's what we typically get.

Okay.

Thanks guys.

Thank you.

One more question.

Yes, Tal Liani, your line is open.

Oh, hi, thank you.

Thanks for letting me ask the question.

I have two questions.

First, when Cisco described what happened to them in the quarter, they used hiccup and words that tried to explain if it's temporary and then they expected the growth rate to go back right after into normal growth rate and I'm making the same question to you, you've grown your product revenues in the last five quarters, anywhere between 9% to 14%, pretty nice range and this quarter is 4%.

The guidance for next quarter, the implied is about 4% again, the question is whether you're saying that the product growth rate could go back up to this 10% level and whether we should model it this way or not?

So that's question number one.

Question number two, I know we don't have time and maybe we can take it offline but the question is the decline in growth rate, is it because the underlying growth in the market is slowing down or is it because you've taken so much share from others that there's just no more share to take and that's what the market share data is suggesting?

So I'm trying to make the distinction between share gains and underlying growth in the market.

Thanks.

Yes, on the first thing, I wouldn't classify it as temporary.

I think we think there's more seasonality than anything in terms of the result last quarter which let me remind everybody was at the top of our range but yes, I would classify it as seasonality.

And we will talk about that more as we get through the year and in terms of the second question and the first question, our pipeline is very, very strong right now, the number of big deals has grown.

We said we expect a strong second half.

That doesn't point to, in our view, any market weakness or market saturation.

Just one more thing on top of that.

John mentioned some of the blue chip companies that we're breaking into with ARX, but I'd expand that across our entire product line.

We continue to take big name competitively held customers to be F5 standard and we're adding follow-on deals to the new customers we've added in the last four or five quarters that are big deals.

They are big multi-million dollar deals so I think you'll see a lot of that coming in this quarter.

Thank you.

Okay, thank you.

Thank you very much.

Thank you all for joining us, and we'll talk to you again next quarter.

Thank you.

That does conclude the conference.

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