F5 Inc (FFIV) 2011 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.

If anyone has any objections, please disconnect at this time.

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

John Eldridge, Director of Investor Relations.

Sir, you may begin.

Thank you, Carol, and welcome, everyone, to our conference call for the third quarter of fiscal 2011.

The speakers on today's call are John McAdam, 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 it is 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In addition, you can access an archived version of today's live webcast from the events calendar page of our website through October 25.

From 4.30 PM today until midnight, Pacific Time July 21, you can also listen to a telephone replay at 866-511-5157 or 203-369-1957.

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.

In the third quarter of fiscal 2011, F5 achieved solid sequential and year-over-year growth.

Revenue of $290.7 million was at the high end of our $287 million to $292 million guided range, grew 5% from the prior quarter, and grew 26% compared to a very strong Q3 a year ago.

GAAP EPS of $0.77 per diluted share was above our guided range of $0.69 to $0.71.

Excluding stock-based compensation expense, non-GAAP EPS of $0.97 per diluted share was also above our guided range of $0.89 to $0.91.

The strong EPS results reflect additional R&D tax credit benefits of approximately $0.05 per share recognized in the current quarter.

Product revenue of $179.3 million grew 22% year-over-year and represented 62% of total revenue.

Service revenue of $111.4 million grew 34% year-over-year and accounted for 38% of total revenue.

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

Both APAC and Japan delivered strong revenue growth during the quarter.

APAC, which represented 16% of total revenue, grew 58% year-over-year.

And Japan, at 7% of total revenue, was up 42% year-over-year.

EMEA, representing 20% of total revenue, grew 15% from the third quarter of fiscal 2010 and was down sequentially.

Accounting for 57% of the total, revenue from the Americas was up slightly compared to the prior quarter, and grew 22% year-over-year.

During Q3, our core application delivery networking business accounted for $282.5 million compared to $270.5 million in Q2.

Revenue from our ARX file virtualization business was $8.3 million, up 16% from Q2 and 32% from the third quarter a year ago.

Both the telco and technology verticals represented 21% of total revenue in Q3.

The financial vertical accounted for 19%.

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

In Q3, we had 2 greater than 10% distributors, Avnet, which represented 16.4% of total revenue, and Ingram Micro, which accounted for 10.6%.

Our GAAP gross margin in Q3 ticked up slightly to 82%.

Excluding approximately $2.4 million of stock-based compensation expense, non-GAAP gross margin also moved up to 82.8%.

GAAP operating expenses of $150 million were within our target range of $147 million to $151 million.

Excluding $20.5 million of stock-based compensation expense, non-GAAP operating expenses were $129.5 million.

GAAP operating margin was 30.4%.

Our non-GAAP operating margin, which excludes stock-based compensation expense, was 38.2%.

Reflecting the R&D tax benefit I mentioned earlier, our GAAP effective tax rate for Q3 was 30.6%.

Excluding stock-based compensation, our non-GAAP effective tax rate was 29.8%.

Turning to the balance sheet.

Cash flow from operations was $101.1 million.

Free cash flow for the quarter was $92.2 million.

We ended the quarter with total cash and investments of $1.057 billion.

DSO at the end of Q3 was 48 days.

Inventories were $17.9 million.

Deferred revenue increased 3% sequentially to $321.9 million.

Capital expenditures for the quarter were $8.8 million.

And depreciation and amortization expense was $5.2 million.

We ended the quarter with approximately 2,350 employees, an increase of 95 from the prior quarter.

During the quarter, we repurchased approximately 472,000 shares of our common stock at an average price of $105.96 per share for a total of $50 million.

Looking ahead to Q4.

While we remain cautious about the impact the ongoing financial uncertainty in Europe might have on our EMEA business, we are seeing strength within our North America enterprise business.

And we believe our US federal business will reflect the seasonal strength we typically see in Q4.

We believe the key drivers of our business remain intact and that we will continue to achieve solid sequential and year-over-year growth in Q4.

With that in mind, our revenue target for Q4 is $307 million to $312 million.

We expect GAAP gross margin to remain strong in the 81% to 82% range including approximately $2.5 million of stock-based compensation expense.

We anticipate GAAP operating expenses in the range of $156 million to $160 million.

This includes approximately $21.5 million of stock-based compensation expense.

Our GAAP EPS target is $0.75 to $0.77 per diluted share.

Excluding stock compensation, our non-GAAP EPS target is $0.97 to $0.99 per diluted share.

We are forecasting an effective tax rate of 35%.

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

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 within a range of $18 million to $20 million.

And we believe our cash flow from operations will be in excess of $110 million.

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

Thanks, Andy, and good afternoon, everyone.

The F5 team delivered another solid performance in the third quarter of fiscal 2011.

The Asia Pacific/Japan region with a start at the quarter with a year-over-year growth rate over 50%.

The Americas year-over-year growth rate of 22% was constrained a bit by some project spending delays in the US federal market, as well as some project spending delays particularly in the financial vertical.

The EMEAs region's year-over-year growth of 15% was clearly impacted by the economic challenges currently present in that region.

We passed a significant milestone on our stellar balance sheet with cash and investments surpassing the $1 billion mark, currently at $1.06 billion, having repurchased $50 million worth of common stock in the quarter.

Our services business once again produced solid results with 34% growth in revenue along with strong contribution to our overall profitability.

Our non-GAAP operating margin was very solid at 38.2%, which is our highest level to date.

We also saw improvement in our ARX sales in Q3 with ARX revenues growing 16% sequentially and 32% year-over-year.

We started shipping our new VIPRION 2400 product, known internally as Victoria, towards the end of the quarter.

The VIPRION 2400 leverages the significant success of our current VIPRION solution by providing industry leading functionality at a very attractive price point.

With the VIPRION 2400 chassis-based architecture, customers enjoy enhanced availability features and the flexibility to scale their ADC infrastructures without changing network, application, or device configurations, leading to dramatically reduced operating expenditures.

As we mentioned in our press release announcing availability of this new product, the VIPRION 2400 is shipping initially with TMOS Version 10.2.2 and will support Version 11 of TMOS when it is released.

Initial sales and customer interest in the VIPRION 2400 has been very high and we expect the level of interest to continue to increase during Q4 and continue additional momentum in fiscal 2012 as customers' option of Version 11 accelerates.

TMOS Version 11, which is targeted to ship in this coming quarter, includes over 150 new sophisticated management and scalability features to enhance data center consolidation and cloud architectures.

Version 11 also includes new application visibility and management features, specific solutions for the telco market, and significant software and firmware performance enhancements to many of our software modules.

Version 11 also includes our sophisticated virtual clustered multi-processing technology, vCMP.

That combines virtualization and multi-tenancy capabilities to help customers consolidate and efficiently manage application delivery services.

vCMP enables multiple instances of BIG-IP software to run on 1 device and provides enterprises the unprecedented ability to have complete logical separation of software version and instances on a single highly scalable device.

This capability is critically important for large enterprises and cloud and other service providers who need on-demand scalability and the ability to ensure that each group's resources and network traffic are fully isolated from one another.

As far as the overall business outlook is concerned, I feel very confident about our prospects both in the short-term as we move into the final quarter of fiscal year 2011 and for fiscal year 2012.

At our last investor conference, we highlighted an application delivery controller technology as a starting point to address other major market opportunities such as security and service provider.

The key to this expansion is TMOS and our ability to deliver application level intelligence at network speeds.

Version 11 contains significant enhancements that directly address these markets.

For example, the majority of money spent on security to date has been targeted at protecting the network.

F5's market leading and award winning application firewall solution, the Application Security Manager, is becoming increasingly vital to our customers as attacks on their IT infrastructure have become significantly more sophisticated, targeting not only the network but applications directly.

The recent high profile hacking exploits against major banks, governments and other corporations demonstrate the inherent weakness of traditional firewall and IP solutions and highlight the need for a security solution that not only protects the assets of the network but of the application as well.

ASM, coupled with the core capabilities of TMOS, allows our customers to blow up this new generation of sophisticated hacker exploits.

We have major Fortune 500 customers replacing traditional network firewalls entirely with BIG-IP.

Along with the significant additional security functionality in v11, our short-term product road map includes additional classification, enhanced network firewall capabilities, and broader application protections that should further accelerate the opportunity to expand our presence in the security market.

We believe this opportunity, coupled with our strategic footprint in the data center, will significantly expand our addressable market in fiscal year 2012 and beyond.

In the context of several global macroeconomic issues, we delivered solid sequential and year-over-year revenue growth in Q3.

And as we stated last quarter, we continue to believe it is prudent to remain cautious in the short-term.

Having said that, we believe there are real growth opportunities for F5 in the foreseeable future and we plan to continue aggressively hiring to expand our sales and marketing, service and development organization and enhance our prospects for future sustained growth.

In conclusion, I'd like to thank the F5 team, our partners and customers for their support last quarter.

And we'll now hand the call over for Q&A.

(Operator Instructions) Rod Hall, JPMorgan.

Thanks for taking my question, guys.

Just a couple of quick ones, I guess.

The first thing that I wanted to see if I could get you to comment further on is the EMEA weakness.

Do you think that that's just -- we've heard it from a couple other companies -- do you think it's just a short-term hiccup driven by all of these negative headlines?

Or do you feel like it's a little bit longer term trend that's developing there?

So I'm just curious if you could give us any color on that.

And then the federal government situation in the US is pretty obvious but it would be interesting to hear if you have any more color on that.

We're all assuming it's just going to get worse over time, but would be interesting to hear what you're thinking about that.

And then I have a couple of additional follow-ups to that.

Yes, on EMEA, I mean we're not -- the answer is, we're not looking too far out here because, frankly, in this type of environment it's difficult to go more than 6 months out.

But if you look at -- first of all, 15% year-over-year isn't that bad considering some of the economic issues.

We've taken a fairly conservative forecast in terms of Q4 for EMEA as well.

So we're not looking for much growth sequentially there at all.

We do feel good about the forecast that we've been given.

And actually, the pipeline is pretty good.

But, of course, you can see a pipeline growing when you get projects that get pushed.

But overall, we feel okay about it.

How long it will last is hard to tell.

And in terms of federal, we did see some deals slip.

Having said that, our federal pipeline, and we did a review with the whole of the US management on Monday, and our federal pipeline is very large and we feel actually pretty positive about our position.

Okay.

And then just the follow-up is I'm wondering whether the 95 headcount additions, you said more than 125.

Are you going to try to catch up?

And can you give us any further feeling for why it was 95?

I assume it's just you're still struggling to find the people quickly enough and get them in place.

Yes, we started off, typically when we start off the quarter we have a lot of acceptances that join over the next, say, maybe the first month of the quarter.

But we knew they had already accepted the offer.

That was lower last quarter than it typically has been.

It's higher this quarter.

So we're never guaranteeing anything on this but we're definitely going to try and push for the 125 plus.

Alex Henderson, Miller Tabak.

Thanks.

I was hoping you could give us a little bit more clarity and detail around the telecom segment.

The fall-off in telecom from 3Q to 4Q last year calendar hasn't really recovered very much percentage-wise here.

It's up a percentage point each quarter.

But can you give us some sense of what's going on there in terms of customers coming back in and re-upping, expanding your footprint with them, the increased commitments, or anything that would give us some better sense of the trajectory of that business?

And then just one factual question.

Can you repeat what you said the OpEx number was supposed to be non-GAAP, because I guess I didn't catch that.

In the guidance, Alex?

Yes, on the guidance.

So operating expenses would be in the range of $156 million to $160 million.

And I said that that includes approximately $21.5 million of stock-based compensation expense.

So excluding -- to get the non-GAAP, excluding.

Okay, I didn't get the exclusion part.

So going back to the telco piece?

Yes, in the telco piece, we did see, obviously, an uptick in terms of the percentage this quarter from previous quarter.

And of course, that has growth in it so we had uptick in the growth, so we did make progress there.

It's much the same scenario which is we have opportunities with large network address translation, with IPv6, with traffic steering is probably the biggest opportunity.

Some of the projects are lumpy.

Yes, and I think it's going to stay that way for some while.

Do you see any increase in penetration at some of the big Tier 1s and some of the key customers that would give you some sense that that is going to continue to increase as a percentage of sales going forward?

I think it's going to stay in that 20% to 25% range.

And depending on when projects drop, you'll see it going up and down typically in that range.

I know it was 19% the quarter before, but typically we see it in the 20% to 25% range.

Okay, and then one last question.

On the European piece, can you give us any geographics play within Europe?

Was there any particular countries that were more egregious than others?

And how do you look at that mix across boundaries?

Thanks.

Hey, Alex, this is Mark Anderson.

I think we saw, much like last quarter, we saw weakness in some of the more macro affected economies in EMEA.

Germany wasn't great.

The UK wasn't great.

But the rest of the theater did pretty well.

I think, like other vendors, we're seeing deals take a little longer to close, customers being a lot more cautious but I think that's pretty much it.

Mark Sue, RBC Capital Markets.

Thank you.

John, it's 2 quarters in a row of limited upside following a quarter where Europe was also below plan.

So one might argue that it should have been factored in.

Do you think that's a larger issue related to saturation of the market, maybe there's no more share to gain?

Is it somehow related to the lack of hiring and sales coverage in the past?

We saw something like this in late 2008 and I'm trying to see if we should be drawing some comparisons, if any.

No, I don't think it's that at all.

Obviously, if you're below forecast you've made a mistake and you need to try and address that.

But in terms of where we sit, I think we've got fairly robust forecast for Q4.

You heard me saying feel really good about some of the opportunities that we've got coming in 2012.

Our pipeline in North America is the highest it's ever been, which is very significant.

And we saw fairly -- and not just our general pipeline but our factored pipeline which is very important because that's the pipeline that we expect has got a very good chance of closing.

So we're not seeing any signs of that.

Is that a tough environment?

To some degree, yes.

Frankly, we saw at some points during the quarter that we probably were going to exceed, but then we saw some of the slippage I talked about in federal and some of the major account verticals like in finance.

But overall, you take any medium term view, we feel good.

Ittai Kidron from Oppenheimer.

Thanks, John.

I'll start with my traditional question.

ARX, is this the time to finally pull out the cake and start celebrating?

Is this a growth driver, consistent one now going forward?

We are all smiling here, right?

I think it's a bit early to do that.

Obviously we saw some good project wins last quarter, some really good ones.

As I've mentioned many times, when we get these wins we tend to get very loyal customers that are willing to talk about the ROI they get and the productivity it gives them.

We saw some more repeat buys, which was a good thing, than normal.

We hadn't seen as much repeat buys, we saw some of that.

But we are not declaring victory on that one yet.

Okay, very good.

And I did want to go back to the federal business.

Clearly, things were delayed this quarter.

And I'm trying to get a sense of how do you get your confidence that this will still close on time in the September quarter?

And the reason I'm asking that question is that, yes, federal budget for this fiscal year has been approved.

That said, you listen to some of the companies in the networking space and IT space and many have been pointing out that despite federal budgets being approved, there's still lingering delays.

And despite some of the specific projects being approved, still dollars are not flowing.

For example, NetScout had a massive pre-announcement because of that.

IBM in its commentary just this past Monday talked about the government channel again for a second quarter in a row being even weaker than they planned.

It seems like your hanging your hat on this thing happening here in the September quarter and I'm trying to understand what is their process and methodology by which you get this high confidence that this will still happen, even though it didn't happen for you for this third quarter.

Yes, and although we saw slippage in the quarter, and we did, we also saw a tremendous performance by our federal team.

The year-over-year growth was actually very significant.

The federal team are probably listening.

I don't want them to think they didn't do a good job because they did.

They did an excellent job.

The real issue is the size of the pipeline and the opportunity.

And then, of course, when you've got a large pipeline like this, you obviously factor it down, and we think we've done that adequately.

But we have a strong project pipeline with the projects in place.

We've got a good feel for where they sit within the cycle.

Again, I admit in this environment, you do have some uncertainty but we feel pretty confident about what we've pinned as a number for that quarter for our guidance.

Is there any color you can give on the federal in the sense of how much of it is extension of existing projects versus new, or how much of it is civilian agencies versus non-civilian agencies, which you can argue are a bit more defensive, maybe, spending-wise?

Yes, a lot of it is projects that are established.

A lot of it is that, certainly.

And it tends to be involved with big systems integrators, as well.

I don't have the data right to hand on the civilian versus military and/or intelligence.

I know it's reasonable in the latter.

It's pretty strong there but I don't have the actual numbers.

Brian Marshall, Gleacher & Company.

Great, thanks guys.

If you look at the last couple quarters, we were adding 120, 125 employees.

Obviously a little bit of a downtick this quarter.

But when do you think -- if you look at the product year-over-year growth over the last couple quarters, starting December 10, it was 44% year-over-year, and then March it went down to 34%.

In June it went down to 22%.

And it looks like guidance kind of at the mid range is applying 16% year-over-year product growth.

So we've got a deceleration of product revenue growth there, obviously.

When are those headcount additions that we made over the past couple quarters really going to start to kick in and drive some of that product growth on a year-over-year basis?

And do you expect in fiscal '12 that to start to come back up to higher levels?

Yes, absolutely.

And we've done a lot of work in that and we've obviously started doing first passes in 2012.

I'm not going to be specific on the quarter.

I don't want to do that.

However, when we look at 2012 -- and this will give you a feel for it -- and we'll give much more data in October -- but we would be pretty disappointed with anything below an annual growth over the 2012 year below 20%.

So in other words, we do see it stabilizing and we do see it starting to increase.

And we'll talk about it in a little bit more detail come October.

Okay, thank you.

And then with respect to --- if you look, the -- well, I guess actually that kind of clarified some of my questions there.

With respect to the revenue growth that you've seen over the past year or so, obviously I think the vast majority of it, or well more than 50% of it came from increased share gains.

I definitely think that that's probably going to slow down but you're going to continue to gain share going forward.

But I do think your account penetration is going to increase pretty dramatically across the board not only in Fortune 500 but --

We don't view that.

When we look at the pipeline, when we look at the addressable market, share gains come as you execute in terms of more Fortune 500 accounts, in terms of penetrating more Fortune 500 accounts, in terms of focusing on areas like security that I talked about.

By definition share gains go, they come.

But really it's all about having that opportunity.

I don't think share gains as such is an issue at all.

Troy Jensen, Piper Jaffrey.

A 2-part question, or 2 answers from you guys.

But, Mark, I'd like to know how often you see Zeus in the field; and, John, your thoughts on Riverbed moving into the virtual ADC market.

Hey, Troy, it's Mark here.

So we do talk a lot about competitive activity in our quarterly business reviews in each theatre each quarter.

And really, Zeus, we don't really talk about them very much.

They're really not in the top 5 that we see on a regular basis.

Mark knows this better than me, Troy.

However, I sat through a 3 or 4 hours meeting on Monday with our North American management and I didn't hear the name once.

What was the second question?

It was the same one.

The second one will be TMOS 11 is coming out.

Obviously there's a lot of applications, customized for service providers.

What's the risk of service providers pausing until they evaluate the new operating system?

I don't -- we look at our service provider forecast and we look at the pipeline, it's based on projects and it's not based on projects waiting on these types of functionality.

So I really don't believe that's an issue.

Karl, I don't know if you want to --?

Yes, hi, Troy, it's Karl.

I just want to clarify, also, because Version 11 isn't just about service provider features.

That's 1 aspect of the release.

It's major new infrastructure features like iApp and vCMP as well as our centralized management.

There's a bunch of things we're doing for the service provider market but also for the enterprise, security and other markets, as well.

And it builds upon our previous technology.

It's a major step but it's not like I think we've seen anybody out there in the service provider market stopping and waiting for it to show up.

So I hope that answers your question there.

Nikos Theodosopoulos from UBS.

Great.

2 questions.

First on Japan.

I think you were expecting that to be down sequentially and it was up strongly.

Can you comment on what changed there and what that might mean for the next quarter?

And a comment on linearity.

Did you see the normal linearity of 50% in the last month or was it better or worse than normal?

Thank you.

Yes, so, on the linearity question, to start with, consistent with last quarter, it was a little bit higher in the third month than we normally see but not a marked difference.

And consistent.

And then regarding Japan, yes, we did expect it to be maybe slower because of all of the disruption.

The resilience of the team and, frankly, the Japanese nation, they just carried on really quickly and we saw a really strong quarter without any disruptions of any kind.

The thing that was very, very positive for us in Japan, and actually in the rest of Asia, was that there is a distinct trend now from lower product sales to higher product sales.

And that, we've been pushing this, Mark and his team, for actually a couple years now and we're starting to see some progress.

So we saw VIPRION type sales, we saw higher end.

And that's a trend that we're seeing.

We started to see it in Japan and we've been seeing it for a few quarters now in Asia which is pretty good.

Kent Schofield of Goldman Sachs.

Great, thank you.

I was wondering if you could just update us on your virtual ADC strategy?

And then also, as I look at share buyback, there was a pretty big acceleration, it looked like over $120 million this last quarter, around $50 million the previous but that compared to an average of $20 million for the previous 8 quarters or so.

How should we think about share buyback going forward?

Thank you.

On the share buyback, actually the total this last quarter was $50 million, so I don't know where you heard the --

No, I must have pulled that, wrong number.

And then Kent, this is Dan.

So as far as the virtual ADC, just virtual editions of our products in general and our strategy there.

So we embarked on that course some time ago.

We launched the first product over a year ago now.

And we now have almost, I believe, all our products available in virtual editions.

So I've been very, very pleased with the progress that we've seen there, the adoption rate, the downloads of trial editions, and more importantly people purchasing them as well.

So I think we've gone from a position of perhaps being a little bit late to the market with the first one out there, originally, to now probably having the most comprehensive solution of any vendor in our space.

The big opportunity we see with the virtual version, and with other areas, as Don said for quite a while now, is that you can develop on it, you can test on it.

And then what you can do is probably deploy on larger systems.

And that's definitely a theme we have seen.

I've seen customers buy it for production but typically it's for development and then followed by using, like VIPRION, for production.

And Kent, one last piece on that.

Really having the combination of the software and the hardware piece is really vital when it comes to customers.

So there's some things like dealing with SSL traffic and other things that are very computationally expensive, that, frankly, aren't well-suited to virtual versions.

And so having both of those turns out to be very, very important in the marketplace.

And as I said, I think between the functionality that we have in the products and the selection that we have between the hardware platform and the virtual editions, I think we're solidly in the leadership position.

Kent, one thing I'll add too, this is Karl.

On Version 11, what we also provide is the ability for us to operate both for customers to manage virtual and non-virtual versions seamlessly, and operate together.

So [essentially] manage this in one large context, which we think is vital to the scaling of these large virtual environments.

Great, thank you for the information.

And the $122 million is the 9-month number, so thank you for that.

So it was around $50 million, around previous quarter, $50 million this quarter.

Is that kind of the new run rate that we should think of going forward?

We have a discussion at the Board in every quarter, we make that decision.

Brian Modoff, Deutsche Bank.

Yes, hi, this is Vijay Bhagavath calling on behalf of Brian.

Hi, John.

Hi, Andy.

A question for you in terms of, we are seeing some major catalysts near term in the horizon.

One is obviously VMware's vSphere 5.

We're also seeing catalysts around mainstream applications, Microsoft applications, Oracle, SAP, et cetera, getting on virtual machines.

And obviously you have the 10 gig upgrade opportunity early next year.

So I'd like to ask you in terms of how proactive is your team both in the sales side and also in the solutions side working with companies such as VMware, Microsoft, SAP, Oracle, etc., and capitalizing on some of these over-the-horizon catalysts, especially vSphere 5?

Vijay, this is Dan.

We're very, very active on that front.

We have some very deep relationships with not only VMware, Microsoft, Oracle.

Many, many others out there, as well, but in terms of the ones that you mentioned.

So with the introduction of things like vSphere 5 or Exchange 2010 or new versions of SharePoint, we have things going on with them so that when those vendors launch their products, we have solutions that are ready to go with them that have been verified by them, as well.

And provide things that are useful for the customers at the end of the day, which is really the most important aspect to it.

So changes in the landscape with their apps evolving and triggering [how] change for customers out there, we view as a very, very positive thing, and lines up very nicely with our solutions.

One thing, Vijay -- this is Karl -- I'll mention to you, you asked about capitalizing on 10 gig.

And the next version of our VIPRION blade, the Centaur Blade, as we call it, natively supports 40 gig out of the chute.

So we'll be supporting the next high speed port.

And also Victoria, which we call the VIPRION 2400, was designed for 40 gig and we'll be introducing 40 gig port modules later on.

So we're trying to very much focus on improving essentially connectivity in the high density interfaces exactly to capitalize on these opportunities.

Okay, thanks.

A quick follow-up.

And obviously you had an interesting win at Telefonica Spain.

So any thoughts on blueprinting that architecture and then looking to position that with other telcos someone such as including Verizon, AT&T in the US?

We wouldn't be specific about project wins like that.

But obviously, we have a very tried and tested tactic which is, if you win a project that you can repeat globally, you go for it.

And I can assure you that at the sales level and the bus-dev level we're very focused on doing that type of thing.

Okay, Carol, let's take 2 more calls, okay, 2 more questions.

Matt Robison from Wunderlich Securities.

Thanks for taking my question.

Can you give us the number of DevCentral users in the --- at the end of the quarter?

And also, you might have mentioned this but if you could repeat the CapEx number you expect for the September quarter.

And there is also, you mentioned strength in the pipeline for North American enterprise but you didn't mention North American service provider.

Is there any particular reason why you didn't say that?

No.

In fact, let me just squash that one.

So the pipeline, when I was talking about the pipeline in North America, I meant strength in enterprise, service provider, and federal.

All of the above.

Okay, thank you.

So back to DevCentral and CapEx then.

Matt, this is Dan.

On the DevCentral front, we finished the quarter at 82,243 registered users.

And CapEx, I actually didn't mention it on the call but for the coming quarter, I think it will be in the same range that we saw this quarter, maybe a little higher.

And on the next call, the October call, we'll give you the outlook on CapEx for the year again.

Okay.

Is it too much to ask to give us that range again since we're not going back to last quarter's commentary?

This last quarter it was $8.8 million and I think we'll see it at that range, maybe a little higher.

At that level?

I see what you're saying.

So $8.8 million to $9.3 million or something like that?

Something in that range.

Jess Lubert, Wells Fargo Securities.

Thanks for squeezing me in there, guys.

So 2 questions.

First on product sales.

This is the third consecutive quarter that we've seen product sales deliver low single digit sequential growth.

So I was hoping you might be able to comment as to whether or not you felt the product strength we saw last year was more catch up spending and perhaps this is the new normal for sequential product growth.

And maybe you can provide some additional information as to what gives you confidence that sequential product trends will improve going forward.

Yes, I think it's hard to deny when you look at the numbers now, and you look at the performance, that it was definitely catch up, or maybe some suppressed demand, especially in the Q3, Q4 cycle.

There's no question about that.

Having said that, as I said earlier, I do think we bottom out and then we start to accelerate.

And that's going to be based on a lot of things.

It's based on, obviously, the opportunity I talked about in security that's becoming stronger for us.

It's based on Version 11 and the product roadmap, and based on WAN optimization and web acceleration.

Web acceleration, for example, we have a new version coming out with Version 11 that is a massive jump in performance.

So if you're a web-based application, which is where the increase is, we're going to have a great optimization solution there.

The VIPRION 2400 is a big -- we had a lot of stuff that I think.

And last but not least, we've been hiring aggressively in sales over the year, and as our productivity moves from the 6 months to the 1 year, you'll see growth there, as well.

So John, is it fair to assume that we're near the bottom in that process and can you maybe --?

As I say, I'm not going to be specific on the quarter.

As I say, Q3 and Q4 were tough comps.

And definitely I think we would be very disappointed with less than 20% next year.

And then can you maybe just provide some additional details regarding metrics, regarding average deal size and how the pipeline is trending sequentially heading into the September quarter and how you're thinking about close rates in the guidance?

Yes, our average deal size was actually pretty consistent with last quarter.

It came down a little bit, but not markedly lower.

And in terms of the close rates, we're actually assuming a lower close rate than we did in quarter three, we're assuming a lower one in quarter four.

I'd like to think there's some conservatism in that but we'll see.

But, yes, we are actually assuming a lower.

But if you look at it, it's a pretty big sequential uptick from a revenue perspective, so we'll see how that goes.

Thank you all very much for joining us.

And again, if you have follow-up calls, please direct them to me, John Eldridge.

And thank you for joining us and we'll talk to you next quarter.

Thank you.

This does conclude today's conference.

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