F5 Inc (FFIV) 2012 Q2 法說會逐字稿

Good afternoon and welcome to the F5 second 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 would now like to turn the call over to Mr.

John Eldridge, Director of Investor Relations.

Sir, you may begin.

Thank you, Carol.

Welcome, all of you, to our conference call for the second quarter of fiscal 2012.

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

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

If you have questions following today's call, please direct them to me at 206.272.6571.

If you don't have a copy of today's press release, you can access one on our website at F5.com.

In addition, you can access an archived version of today's live webcast from the investor relations events calendar page of our website through July 18, 4.30 p.m.

today until midnight Pacific Time, April 19.

You can also listen to a telephone replay at 866.503.3214 or 203.369.1863.

As we indicated in our press release, financial results for the second quarter reflect some changes in the way we report our non-GAAP measurements.

Prior to Q2, our non-GAAP results have excluded only stock-based compensation expense.

Following the acquisition of Traffix Systems in February, we have decided to adopt common industry practice and exclude amortization of purchased intangibles and all acquisition-related charges as well.

Going forward, we believe this practice will provide investors with a more accurate representation of our operating business model.

A full reconciliation of GAAP to non-GAAP results for Q2, and our Q3 earnings guidance is provided in our press release in the consolidated statements of operations included in the press release and also posted on our website.

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 the quarterly press release and described in detail in our SEC filings.

Before we begin, I want to remind you 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.

F5's fiscal second quarter marked a return to product revenue acceleration, as strong Telco sales and continued momentum in software and security drove revenue ahead of our guidance.

Revenue of $339.6 million, which exceeded the high end of our $332 million to $337 million guided range, grew 5.3% from the prior quarter and 22.4% year-over-year.

In line with our expectations, Q2 revenue from Traffix Systems was not material to results.

GAAP EPS of $0.86 per diluted share was at the high end of our guided range of $0.84 to $0.86.

Non-GAAP EPS, which excludes stock-based compensation, amortization of purchased intangible assets, and acquisition charges for Traffix, was $1.09 per diluted share, above our guidance of $1.05 to $1.07.

Product revenue of $205.2 million grew 18% year over year and represented 60% of total revenue.

Service revenue of $134.5 million grew 29% year over year and accounted for 40% of total revenue.

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

On a geographic basis, Americas revenue increased 21% from the second quarter of fiscal 2011 and accounted for 58% of total revenue.

EMEA revenue, which represented 21% of the total, increased 19% from the second quarter of last year.

APAC contributed 14% of revenue, up 24% year over year and Japan accounted for 7% of revenue, a 47% increase year over year.

During Q2, our Application Delivery Networking business contributed $333.1 million in revenue.

This compares to $316.9 million in Q1 and $270.5 million in the second quarter a year ago.

Revenue from our ARX file virtualization business was $6.5 million compared to $5.5 million in Q1 and $7.1 million in Q2 of last year.

Telco was our strongest vertical in Q2, representing 27% of total sales.

Financial was 16%; technology, 19%; and government was 12%, including US federal, which accounted for 6% of the total.

In Q2, we had two greater than 10% distributors -- Avnet, which represented 16.6% of total revenue, and Ingram Micro, which accounted for 13.9%.

Behind continued strong sales of software, GAAP gross margin improved in Q2 to 83%.

Non-GAAP gross margin was 84.2%.

GAAP operating expenses of $177.3 million were above our target range of $170.5 million to $174.5 million.

Non-GAAP operating expenses were $155.7 million.

GAAP operating margin was 30.8%.

Our non-GAAP operating margin was 38.3%.

Our GAAP effective tax rate for Q2 was 35.3%, and our non-GAAP effective tax rate was 33.8%.

Turning to the balance sheet.

Cash flow from operations was $101.6 million, contributing to total cash and investments of $1.034 billion at quarter end.

Free cash flow for the quarter was $94.6 million.

Capital expenditures for the quarter were $7 million.

DSO at the end of Q2 was 49 days.

Inventories were $17 million.

Deferred revenue increased 8.6% sequentially, to $412.8 million.

We ended the quarter with approximately 2,805 employees, an increase of 190 from the prior quarter.

During Q2, we repurchased approximately 404,000 shares of our common stock at an average price of $124.44 per share for a total of $50.3 million.

Approximately $281 million remains authorized under the current share repurchase program.

For our outlook, we continue to believe F5 will generate sequential revenue growth throughout fiscal year 2012 and achieve annual revenue growth for the fiscal year of at least 20%.

We are very happy with the early sales activity around the Traffix technology acquired this quarter, and John will discuss Traffix in more detail.

However, for Q3, we do not anticipate a material revenue contribution from Traffix Systems.

With that in mind, our revenue target for the third quarter of fiscal 2012 is $350 million to $355 million.

We expect GAAP gross margin in the 82% to 83% range, including approximately $2.5 million of stock-based compensation expense, and $1.7 million in amortization of purchased intangible assets.

We anticipate GAAP operating expenses in the range of $180.5 million to $184.5 million, including approximately $22 million of stock-based compensation expense, and $200,000 in amortization of purchased intangible assets.

Our GAAP EPS target is $0.88 to $0.90 per diluted share.

Our non-GAAP EPS target is $1.12 to $1.14 per diluted share.

We are forecasting a GAAP effective tax rate of 35% and a non-GAAP effective tax rate of 33.5%.

We plan to increase our head count by approximately 125 employees in the current quarter.

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

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

I was very pleased with our Q2 results.

We delivered solid year-over-year revenue growth of 22%, and 18% year-over-year product revenue growth.

I was also pleased with the performance of all our major sales regions.

Each region produced solid year-over-year sales bookings growth.

The Asia-Pacific-Japan region had a very strong quarter especially in Japan and China.

North America had another well-executed quarter, driven by very strong service provider sales and an improvement in our US federal business.

EMEA had an excellent quarter, with solid year-over-year and sequential sales growth.

Our services business had another stellar quarter, exceeding both revenue and profit goals, as well as posting a very significant increase in deferred revenue of approximately $33 million.

Continuing the momentum from Q1, sales of our VIPRION chassis-based products were very strong, with sales bookings of VIPRION up over 200% from last year.

We also continued to experience strong sequential and year-over-year growth in sales from our software-only virtual edition solutions.

With stand-alone virtualizations of our entire suite of software modules, we now have the most comprehensive portfolio of software-only ADCs in the market.

Attach rates for all our software modules also showed strong growth, especially those that are part of our integrated security offering.

All of our security products continued to gain momentum in Q2.

In addition to strong sales of ASM, APM, EDGE Gateway, and DNS security modules, we saw a growing demand for our TMOS-based data center firewall solution, which has attained ICSA certification.

During the quarter, we enjoyed a large number of significant wins protecting large web-based application environments where traditional firewalls lacked the functionality and scalability needed to deal with these new advanced persistent threats on large customer-facing applications.

With TMOS v11 running on our high-end systems like the VIPRION 4400, we can deliver more than eight times the throughput of our competitors' firewall solutions at a significantly lower price, while still providing the industry-best Layer 3 to Layer 7 security and application functionality.

In late February, we augmented our expanding array of Telco-related capabilities with the acquisition of Traffix Systems, the leading provider of diameter-signaling products for service providers.

The diameter protocol has gained industry-wide acceptance by the 3GPP and GSMA as a standard for the network signaling and all 4G LTE networks.

Diameter plays a vital role in the management of 4G LTE and IMS networks, including billing and policy deployments, enabling service providers to monetize the network by providing a menu of subscription-based services.

The Traffix team's deep understanding of the needs of service providers and their skill in developing technology to manage, scale, secure, integrate and apply diameter services within legacy and next generation networks is a uniquely valuable asset.

No other company in the industry has a wide and rich functionality to simplify and enable the next generation diameter signaling infrastructure.

Its recently introduced Signaling Delivery Controller, SDC, provides a strategic point of control in the service provider's networks, acting as an intelligent tier in those networks, enabling interoperability, security, scale, and flexibility in managing and optimizing signaling traffic.

That should sound familiar to anyone who follows F5.

Our vision has been to create a converged carrier architecture that unifies IP services end-to-end across the application, data, and control plane.

Diameter is a foundational piece of that puzzle and we are delighted to have the Traffix team join the F5 family.

As Andy mentioned, while we do not expect to see any material revenue contribution from the Traffix diameter products in Q3, we are very pleased with the progress we have made and the growing number of proof of concepts we are engaged in around the world as service providers accelerate the launch of 4G or LTE networks.

Early indications from these POCs are quite positive and we believe validate the unique value proposition the combination of F5 and Traffix offer to service providers in this rapidly expanding market.

With respect to our core ADC business, we continued to extend our technology leadership last quarter, with the introduction of the VIPRION 4480, our newest chassis-based product specifically designed to enable service providers and enterprises to address rapidly increasing traffic levels and a growing demand for enhanced services.

With the industry-leading capabilities of the VIPRION 4480 and our other high end platforms, organizations can more efficiently scale their infrastructures and seamlessly integrate security, including data center firewall and access solutions, without sacrificing performance or ease of management.

VIPRION 4480 extends our performance leaderships in all key metrics, including SSL, Layer 4 and Layer 7, and includes the market's first 40 gigabit per second Ethernet support for an applications-and-services platform.

By leveraging F5's hardware and virtual platforms and our peripheral clustered multiprocessing technologies, organizations can remain more flexible as they build out dynamic infrastructures, including cloud and virtualization technologies to support business initiatives and ever-growing user requirements.

Unlike other vendor's products, which can be difficult and costly to upgrade, our VIPRION solutions automatically pool resources as new blades are added, enabling organizations to implement a true scale and demand strategy.

The new blades in the four-blade VIPRION 4480 chassis effectively double the performance of the VIPRION 4400.

And an 8-blade version is planned for later this year.

We are also making good progress on our plan to refresh the current one-year and two-year appliances this year, leveraging technology that was developed for the VIPRION 2400, including next generation CPUs, FPGAs, and other components.

In addition, we have another major lease of TMOS planned for later in the year, which will include DPI functionality, a host of new security features, and major enhancements for private and public cloud environments.

As far as the outlook is concerned, Andy indicated we expect to see solid sequential growth this quarter.

I feel very confident about the future prospects for F5.

Our technology leadership is as strong as it has ever been.

Our competitive win rates in the field remain at world class levels, and our pipeline of future sales opportunity is extremely robust, as we enter the second half of fiscal 2012.

We are really well positioned to take advantage of the growth opportunities in our core ADC market, as well as exploiting new expanding market opportunities in cloud-based architectures, the security market, and the service provider market.

I would like to take this opportunity to thank the entire F5 team and our partners and look forward to the continued support throughout the year.

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

(Operator Instructions) Ittai Kidron, Oppenheimer.

Thanks and congrats, guys, on a good quarter.

Maybe just a couple questions.

First of all, Andy, on your comments on the Traffix impact on the P&L, can you tell me what nonmaterial means?

What is the dollar level you feel is immaterial?

Because my contacts are telling me Traffix is doing $3 million to $4 million a quarter and if we account for that, not sure how I'm going to view your June quarter guide.

And, John, can you talk about -- it looks like a lot of things kind of went well in the quarter.

Can you talk about what sort of the things that didn't go well from your standpoint in the quarter and what is it that you're focusing on from an execution standpoint near term?

Yes, so Ittai, it's Andy.

On Traffix, when I say not material, I mean on the revenue side.

I'm talking pretty small amounts, primarily service-driven revenue at this point.

We're looking at the revenue recognition.

And when I talk about next quarter in our guidance, we're not assuming revenue from Traffix, so that's what I would assume.

Okay, very good.

And then the question to me regarding what didn't go so well.

Well, first of all, let me reiterate, I was very happy with the fact that all the regions had good, robust performances and I talked about that.

And Andy gave some specific detail on it.

So I was really happy with that.

If you look at the verticals, clearly financial vertical was down somewhat from its normal value.

We don't think there's anything systemic there at all.

In fact, we expect it to be up in this current quarter.

Telco was very high and that we expect that to be down somewhat in the coming quarter, which I guess balances that.

And really, when we look at the pipeline, that's the way we manage the business, the overall pipeline, and I mentioned it was really good.

So I was pretty pleased.

I was obviously very pleased with security and what we're doing there, right across the board and the data center firewall solutions are coming on very strongly.

They're part of an overall solution, but security in terms of being part of the features of that overall solution, has been excellent.

The software module attach was really good as well.

So generally, pretty happy.

Okay.

Very good.

Good luck, guys.

George Notter, Jefferies.

Hi.

Thanks very much.

I just wanted to ask about the public sector piece of your business.

We get the sense from the IBM call last night that public sector was softer for them certainly.

Could you talk a little bit about what you're seeing there, what the outlook is going forward?

Thanks.

Yes, I mean, first of all, the issue with the phrase, public sector, is that a lot of companies define it differently.

We tend to talk about core government business, both globally and then of course US federal.

The US federal did show improvement this quarter.

I mean we're still --- I still think you have to be very wary, given the situation we're in, in terms of budgets and the government and the voting year this year.

So, we are being I think reasonably conservative about it.

And then if you look well away, there wasn't much change for us, so really no -- slight improvement in federal and not much change elsewhere.

Erik Suppiger, JMP Securities.

Good afternoon.

Say, just quickly on the data center firewall, when do you think that that will be a meaningful revenue contributor, or are you at production level at this point, where you're seeing it deployed in a production environment?

Yes, it's very much a meaningful revenue contributor right now.

I mean, we have won pretty significant deals, and by significant, greater than $1 million in some cases.

As I mentioned, sometimes we have the scenario where the customer's not only using it as a data center firewall, but maybe doing some optimization as well, and that's why we're -- in terms of producing actual numbers, it would be too subjective to do that.

But it's extremely material, as is the ASM, Application Security Module.

And we just finished our quarterly business reviews, again, with North America and the field is really high on our Access Policy Manager as well, the Access Module.

So security has been actually material for us, but it's definitely something we think is going to be an expanding opportunity.

And who are you competing with in some of those seven-figure deals?

Very often with Juniper, with Cisco as well.

We have probably seen some Check Point, I'm not sure, but Juniper is probably the main area.

Yes, this is Manny Rivelo.

We've seen all three of those players.

Those are the predominant firewall players that have been in the market for a long time.

And what we're seeing is, because the new threat vectors that are out there, to protect these web applications, customers are looking at Layer 3 through Layer 7 integrated functionality at very, very high connection counts and throughput.

And what the TMOS-based data center firewall provides, and has always provided, is the capability of scaling at a very, very high level, specifically around applications.

So it's been a logical marriage, because in quite a few of those environments, they have already been using the F5 technology and the result of that now consuming security services on top of the traditional services that they have used.

And you saw some good growth sequentially in that, with regards to those large, data center firewall deals in the March quarter?

We saw good growth sequentially with ASM, APM, EDGE Gateway.

In other words, all the software modules, as well as systems and architectures based on the data center firewall.

Great.

Thank you very much.

Yes.

Jason Ader, William Blair.

Yes, thank you.

John, I wanted to just drill down on the North American enterprise business.

If I look at the Americas business, it was up about $7 million sequentially.

Federal was up $7 million sequentially, so it implies nonfederal was flat sequentially.

But Telco is up $18 million sequentially.

I know that probably a lot of that is in the Americas, so it sort of implies North American enterprise was down sequentially.

I want to get a sense of whether that's something to be concerned about.

If something happened in North American enterprise that disappointed you, or was it more of a bookings versus revenue kind of thing?

Yes, sort of all of the above.

But in terms of concern, as we look out in the pipeline, as we look at the current guidance we've gotten this quarter, we see the enterprise business being reasonably strong.

I mentioned the financial vertical was definitely lower than we would expect it to be and we expect to see a rebound in that.

But that's the good news.

The not so good news is we don't see Telco being quite as strong this quarter as it was last.

Still robust, but not quite as strong.

Just the technology vertical for the last two quarters has actually been down year-over-year, so just kind of wondering what's happening there.

Is that just lumpy?

Yes, I don't think there's anything.

Yes, I don't think there's anything significant there.

I mean, what was it, 19% this quarter?

Which is typically -- that tends to be at the slightly higher end of the range.

Okay, thanks.

Brian White, Topeka.

Hi, John.

Could we talk a little bit about what you're seeing in the 4G networks?

I know you were at Mobile Congress.

I think the number of meetings you had really took an uptick this year.

So when are we going to see kind of the inflection point with the buildout of these 4G networks and F5 benefiting?

Yes, I wouldn't give a specific time, but if you look at last quarter's Telco business, we had reasonably large sales that were linked to future deployment of LTE.

So, I'm not going to call that an inflection point, but I think it's now ongoing.

And obviously with the acquisition of Traffix, as we look into FY '13, we think we could do extremely well in that environment.

Okay, great.

Thank you.

Simon Leopold, Raymond James.

Great.

Thank you.

Wanted to check on two things.

One is your Telco business obviously very strong and it stands out in the sense that this is typically a very tough seasonal quarter for Telco spending and not the case for you.

So if we could get a little bit more color as to why your sales in this vertical kind of defied the typical seasonality.

And I understand you're suggesting it will be down sequentially in June, but help us understand the activity behind that.

And then the other thing I was hoping you could give us a little bit more color on, is I understand you can't specifically highlight a number for revenue from security, but maybe you can give us a sense of revenue that's coming from adjacencies to load balancing that would include WAN optimization security to help us understand the expansion of the addressable market.

Thank you.

Yes, on the seasonality on Telco, we haven't seen significant seasonality, and that could be linked to the size of our business, because versus, you know, some of our larger peers, clearly we're not anything like as big as [lean] Telco and we tend to be project-oriented, so we win projects that are linked.

And we're not just plumbing.

We tend to be linked very much to the application, the solution, and they've got a good idea of what their architecture is going to look like.

We do see add-on as traffic increases and there's an urgent need to manage that traffic.

So as the actual systems are running as well, but bottom line in Telco -- the bottom answer would be it's more project-oriented than anything.

And, you know, we had some pretty strong projects landed last quarter.

And the activity in the adjacencies, if you could quantify that?

Well, that's really the add-on modules that for years we've decided never to quantify.

I did say that it was very, very strong last quarter and increasing in all the regions, as the sale of value and that could be -- security is a leader in that.

There's no question with APM and ASM and solutions like that and the access.

However, products like WebAccelerator remain very significant for us.

The WAN optimization module as well.

But we're not specific on the numbers.

So just to round that one question out then, in terms of kind of the newer areas then, the diameter routing and DPI that you have not yet registered revenue in, how do you think those are in terms of materiality one or two years from today?

Thank you.

[Very] significant.

I'm not going to be drawn into giving a percent.

Extremely significant and [they have] both areas, that's where the trends are going, not just in Telco.

I think that they are going to have a capability and a solution base in the enterprise as well.

Thank you.

Alex Kurtz, Sterne Agee.

Yes, thanks for taking the question, guys.

When you look at the 2400 and sort of the pipeline it's built for you guys over the last couple quarters here, do you have a sense now about sort of incremental opportunity?

Can you put a number around it?

Can you talk a little bit in any more detail about how that product's helping you, especially in sort of midtier, midrange, midmarket kind of enterprise accounts?

Yes, as to breaking out the number, we get asked that every quarter and we just -- we don't break out to that level of detail on product mix.

But we have talked quite a bit about the impact in enterprise and at the 2400, they are playing very well.

The price performance on that box fits right into our range, right around the 8900, and is a great option for people who are looking at expanding environments.

And we think -- (multiple speakers)

V11 is still in the --- [would add to] that -- I'm not good at this inning thing -- probably the sub-innings or something?

(laughter) Sorry, my baseball analogies are not good.

But anyway, we're still -- we're not at half time in terms of the v11.

That's going to increase.

One of the features in that vCMP, the ability to run multiple versions, that's doing well.

It grew well from last quarter to the quarter before, but it's got a long way to go.

And I think that's when you really see the chassis being filled up by blades, growth towards it, so I think there's a fairly big runway with the 2400 and the 44, now the 4480.

So you see the 2400 sort of getting -- increasingly helping you getting to your numbers every quarter, or is it still sort of a smaller portion of the overall pie?

It's very significant.

Okay, thank you.

Yes.

Brian Marshall, ISI Group.

Hi, thank you.

This is Stephen Patel calling in for Brian Marshall.

Can you discuss the progress in your iApps ecosystem?

I believe you had around 35 to 40 iApps at last count a few months ago.

Has that increased?

And have you seen greater penetration in accounts from having those new app delivery capabilities?

Absolutely, Stephen.

This is Dan Matte.

So we continue to see growth there.

We have a team that actually works on iApps day in and day out, internally also working with our big application partners, like Microsoft and Oracle to try and simplify deployment for (inaudible).

So that continues to grow.

I don't know off the top of my head the number.

I know it's more than it was last quarter.

We're seeing that tie into a couple of different places, too.

One is with continued growth in DevCentral, and that continues to be a place where people pick up on iApps and make use of them and share them with other people.

And then the other thing is we're using them to help push into markets to penetrate different areas.

For example, VDI, where we've done a lot of iApp work to help us penetrate the VDI market more successfully and push F5 technology into places and to help people save money and get better performance.

Okay, and a follow-up if I could, there's been more discussion recently around SDN and OpenFlow taking some traffic engineering features out of switches.

Can you talk about the opportunities for you and possible changes in the competitive set in that type of network paradigm?

Yes, you know, we've been following that for quite some time, both the sFlow -- not sFlow, but the OpenFlow and the OpenStack initiatives.

Internally, we've been working towards looking at how that could be adjacent or fit into our business.

But in terms of the technology, we see a pretty good synergy with what we do and how that might fit that model, and so we expect to work with that in the future as we go forward.

Great.

Thanks very much.

Alex Henderson, Miller Tabak.

Thanks.

Could you quickly just characterize your thoughts relative to how you thought the European business did relative to your expectations?

You made that comment last quarter.

And then the question I really want to ask was around the virtualized market.

The virtual CMP product, desktop VDI with VMware, can you talk a little bit about how that's progressing?

You had made the comment a couple quarters back that your cloud-based business was growing, quote, triple digits, even if it was on a very small base.

Can you kind of put those into some context for us, so we have a little bit of granularity on how those pieces are doing?

Yes, hey, Alex.

I'll take the first part of your three-part question.

This is Mark Anderson.

So, yes, we're really proud of EMEA.

As amazing as it seems, our business has grown there really well.

Year-over-year, sequentially quarter-over-quarter, and amazingly consistent across the geographies, including Southern Europe, where the economies are the tightest.

So I think really good execution, obviously market-leading technology and a strong work ethic from the team out there.

And Alex, this is Dan on the rest of it.

So on the cloud front and virtual additions, tackle that first.

So we continue to see great growth in adoption of our virtual additions.

As John mentioned, sequential growth and year-on-year growth, that we're very, very pleased with.

We're not breaking that out as a number or percent.

In terms of the cloud piece, lots of things going on on that front.

We have programs to let cloud providers adopt our technology and resell it basically into their environments and to their customers.

We've seen a great deal of interest and we're sort of early days with those programs.

But those move forward for us.

On the VDI piece, there are I guess a couple things going on.

One is that we've been doing a lot of work in terms of partnering with folks like VMware and Microsoft and coming up with things like iApps to help deploy into their environments and help make their solutions work even better.

And then as I mentioned earlier, too, we have some great solutions that we launched and announced earlier, or last quarter, for environments like Citrix, with their Xen piece and having F5 and BIG-IP fit in and actually, in our opinion, work even better than their own products.

So that's been successful for us, too.

Just to make a follow-up, on the VMware desktop thing, my understanding is VMware wants to compete very heavily against Citrix in that space and that they need an ADC to pull it.

Obviously Citrix moves a lot of the NetScaler products with that.

Can you talk a little bit about how aggressive VMware is relative to pulling you into deals where they are going after those type of installations and how early is that?

Yes, sure, Alex.

We work with them in the field.

I think we have a common enemy in Citrix and I think there's strong motivation on both sides.

Okay, thanks.

Nikos Theodosopoulos, UBS.

Thank you.

Just a couple clarifications on Traffix and then a question on service provider.

So just so I understood a prior question, did you -- your expectation is that the Company will do no revenue next quarter, or is there something with deferred and write-downs and backlog, where you're not going to be able to recognize any revenue?

I'm just trying to understand beyond the next quarter, what should we expect?

And given the number of employees that are coming in, you didn't mention really anything on OpEx.

Once again, do you see that immaterial in the $1 million to $3 million range a quarter?

Any comments on that?

Yes, so in terms of OpEx, so we did bring on 60 people as part of our 190 increase and in our comments on the press release, we said we're going to manage that as an investment into our current business model structure.

And that's how we're looking at it.

So still targeting at 38% operating margin as a business and we're going to bring that in.

In terms of the revenue, definitely there is some carry-over revenue in service that we do have to write down.

And so there will be very modest revenue, is how I would put it, but not enough that we factored it into guidance in any meaningful way.

Okay, okay.

And that persists for a few quarters that lack of revenue?

The way we're viewing it at the moment is fiscal '13.

You know, as we mentioned, we're doing a lot of proof of concepts.

We feel very good about the reaction we're getting from the customer base with the solution.

Clearly LTE is critical, but these tend to be fairly long-term decisions.

So really, when we look forward, fiscal '13 is when we really believe we're really going to get a payback.

Okay, and then just one final clarification on Traffix, just looking at the cash flow statement, was the $128 million for acquisitions all tied to that particular deal?

I don't recall any other deals you announced in the quarter.

Yes, I mean, we actually didn't publicly disclose the details of the deal, but, yes, you're looking at the line and that was specifically for the Traffix acquisition.

Okay, all right.

And then my question separate from that was on the service provider business and wireless.

Do you have a rough estimate overall as to what percentage wireless is?

And since you probably sell to almost all the wireless carriers, when they do begin an LTE buildout and they already have your products installed, what would be the incremental purchasing that they would need for LTE when they start rolling it out?

Or would your benefit come as they start seeing the increased traffic growth and it's more a function of subscriber growth coming onto the network?

So difficult to answer the way you've referenced the question, because typically, we win fairly big projects based on growth of traffic.

That's absolutely where we're stealing traffic, we may be securing the traffic, we may be doing carrier grade NAT, network address translation.

Obviously the Diameter now is an extra solution in that basis so it's hard to give you a specific feel apart from -- we've a fairly growing portfolio now of solutions that are absolutely linked to a growth in mobile and the LTE-type architectures are coming along.

But that's why the VIPRION platform has been so popular at the service providers, because they can simply add blades and not have to reconfigure their entire network, unlike our competitors' solutions where they have to go back in and reapportion VLANs and other network configuration settings that we don't have to do.

So we truly scale these networks, especially when they are starting to deploy these carrier-based cloud architectures.

A very good example of that was last quarter, with a reasonably sized order that was mainly doing optimization, but also because of VIPRION's power and its flexibility, is also doing some security, firewall security features as well.

Got it.

Okay, thank you.

Mark Sue, RBC Capital Markets.

Thank you.

John, it seems the dynamics in Telcos, the uptick with Traffix and security are all better than when you gave your 20% year-over-year revenue guidance.

And when you add DPI and the ramp in LTE, does it make you want to look around the conference room table and think 30% growth this year?

If my memory serves me well, that's very similar to last quarter's question, Mark.

I may be wrong in that.

I'll look back and check, but I think I have that 30%.

We're not going to update during the year where we're at.

We said we would be disappointed with less than 20%.

That's still the case.

You have Andy's confidence about the second half and sticking to that.

But we're not going to give any updates.

In terms of -- what I will say is that --

What's going better, John, then, would you say?

What I will say is what's becoming clear to us here is that when we look at the core business, we feel good about that.

We feel good about our product road map, the refreshing, the 2400 vCMP v11, et cetera.

We feel very good about our security and the ability to do additional business in security and the momentum we're getting with that.

And we also feel -- and I'm really now talking about FY '13 that with Diameter and what we're doing in service provider that we can see an expanding market there as well.

That's helpful.

Thank you.

Good luck, gentlemen.

Troy Jensen, Piper Jaffray.

Thanks for sneaking me in.

How about a quick question for Karl and Manny, and I do have a follow-up to (inaudible).

When you guys talked about security you talked about really baking off against Cisco, Juniper and some Check Point.

Didn't hear you guys call out Palo Alto.

I understand they are more enterprise.

You guys are more data center.

Given your Layer 4, you can look at high levels of streams.

Can you move downstream to get more of the enterprise business and compete more in where Palo Alto is competing today?

Yes, this is Manny, Troy.

So let me start off by kind of explaining a little bit the use case that we go after, because it's a little different than the use case that Palo Alto predominantly goes after.

The use case that we provide a lot of value today, and that doesn't mean we're not going to expand the portfolio, but today, is really an inbound firewall and what I mean by that is a firewall that's defending a set of web-based applications and inbound traffic.

Users from the internet are coming into a business trying to access that application.

In that type of environment, what we're trying to do is provide Layer 3 to Layer 7 controls to protect those web applications from DDoS attacks, application vulnerabilities, et cetera.

And we are protecting those applications which are very well defined from millions, if not tens of millions, or potentially billions of users trying to access those applications.

In that situation, our firewall capability not only is much more extensible but also provides deeper visibility, inspection, and extensibility than anybody else out there.

The Palo Alto use case does not scale.

They stop at about 40 gig from a performance and characteristics point of view.

We start and keep on going beyond that.

So it's not an equal comparison in the inbound side.

On the -- what Palo Alto does really well is provide firewall capabilities for an enterprise, when an enterprise is trying to access outside to the internet-based applications.

And in that situation today, we're not bringing to market yet a solution.

Have you guys talked about a time line for outbound traffic?

No, we haven't, Troy.

Okay.

It's not imminent either, just so we're clear.

Okay, perfect.

How about quickly for Karl, so when I think about SS7 signaling, I guess I think about Telco core versus data center deployments.

I may be wrong, so correct me if I am, but is Traffix platform going to sit in a different spot of the network than BIG-IP?

Or are we just talking about absorbing some of the 4G signaling into just the data center piece of signaling?

Well, I mean, the strength of the Traffix platform is its ability to support all the legacy interfaces, and SS7 being one of those.

So I don't see why it would sit anyplace different than perhaps where BIG-IP could sit in the network.

But it's distinctly different in what we can do with the BIG-IP today, because with the BIG-IP we can scale Diameter, we can connect multiple end points, do things like that and scale that traffic but it's not per se a full Diameter router with all the very flexible legacy support that the Traffix product has.

So if an operator is adopting Diameter routing, they would need your products in the data center, but they would need other things also kind of in the core of the network?

In terms of for Diameter, no.

I mean -- we should be able to provide the full Diameter routing capabilities right now.

And then signaling for 4G?

And then -- yes.

Perfect.

All right, guys.

Keep up the good work.

Rod Hall, JPMorgan.

Oh, hi, this is Rajat Gupta from Rod Hall's team.

I was just wondering if you could comment on FQ4 seasonality.

Do you expect that to be similar to prior years and also if you would comment on the linearity of FQ2 revenues in your core business.

Sorry, just to be clear, did you say Q4?

Yes, FQ4 seasonality and the linearity in FQ2?

Yes, because -- I mean, we will give fairly granular guidance for Q4, but we won't do that until after this current quarter, Q3, is complete.

Typically, it's a very strong quarter but we'll wait till the next quarter to talk about the details of that.

Okay.

Also, could you comment on the linearity of your revenues this quarter compared to what it was last year and also what kind of visibility do you see this year than you had seen 90 days earlier?

Yes, so the linearity this quarter was actually better than a year ago, I mean the third month being a little bit above 50%.

And as far as our visibility, John talked earlier about evaluating our pipeline and looking at the deals.

And we feel really good about our visibility right now.

Deal by deal, going through it, talking with sales management, definitely on a quarterly basis, and even six months out feel pretty good.

Okay, thank you very much.

All right, thank you.

We look forward to meeting with many of you during the quarter and talking with you on next quarter's conference call.

Thank you for joining us.

Thank you.

This concludes today's conference.

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