F5 Inc (FFIV) 2012 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.

Thanks, Victor.

Welcome, all of you, to our conference call for the third quarter of Fiscal 2012.

Speakers on today's call are John McAdam, President and CEO, Andy Reinland, Senior V -- Executive VP and Chief Financial 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, 206-272-6571.

If you don't have a copy of today's Press Release it's available on our website F5.com.

In addition, you can access an archived version of today's live Webcast from the Investor Relations events calendar page of our website through October 24.

From 4.30 p.m.

today until midnight Pacific Time July 19, you can also listen to the telephone replay at 866-454-9170 or 203-369-1254.

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 described in detail on 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.

In the third quarter of Fiscal 2012, F5 achieved solid sequential and year-over-year growth in what proved to be a challenging macro environment.

Revenue of $352.6 million grew 4% from the prior quarter and 21% from the third quarter of last year and was within our guided range of $350 million to $355 million.

GAAP EPS of $0.91 per diluted share was above our guidance of $0.88 to $0.90 per diluted share.

Non-GAAP EPS of $1.14 per diluted share was at the high end of our $1.12 to $1.14 guided range.

Product revenue of $207.1 million grew 15% year-over-year and represented 59% of total revenue.

Service revenue of $145.5 million grew 31% year-over-year and accounted for 41% of total revenue.

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

During Q3, our core Application Delivery Networking business accounted for $346.3 million and revenue from our ARX File Virtualization business was $6.3 million.

From a geographic perspective, all theatres generated sequential and year-over-year revenue growth.

At 57% of total, the Americas grew 22% year-over-year, EMEA accounted for 21% of revenue, an increase of 27% versus Q3 of 2011.

APAC represented 15% of the revenue mix with 17% growth year-over-year and Japan was 7% of revenue up 9% over a strong Q3 of 2011.

Looking at our key verticals, Telco accounted for 22% of sales.

Sales into the finance vertical represented 23% of total.

Our US Federal business equaled 6% of sales with total Government at 12% and Technology accounted for 16% of total sales.

In Q3 we had two greater than 10% distributors, Avnet, which represented 17.3% of total revenue, and Ingram Micro which accounted for 14.8%.

Our GAAP gross margin in Q3 was 82.9%.

Non-GAAP gross margin was 84.2%.

GAAP operating expenses of $182.3 million were within our guided range of $180.5 million to $184.5 million.

Non-GAAP operating expenses were $161.3 million.

GAAP operating margin was 31.2%.

Non-GAAP operating margin was 38.4%.

Our GAAP effective tax rate for Q3 was 35.2% and our non-GAAP effective tax rate was 34%.

Turning to the balance sheet.

In Q3, we continued to strengthen our financial position.

Cash flow from operations was $113.4 million, contributing to total cash and investments of $1.1 billion at quarter end.

Free Cash Flow for the quarter was $107.7 million.

DSO at the end of Q3 was 49 days.

Inventories were $17 million.

Deferred revenue increased 5% sequentially to $433.9 million.

Capital Expenditures for the quarter were $5.7 million, and depreciation and amortization expense was $10.1 million.

We ended the quarter with approximately 2,905 employees, an increase of 100 from the prior quarter.

During Q3, we repurchased approximately 425,000 shares of our Common Stock at an average price of $117.59 per share for a total of $50 million.

Approximately $231 million remains authorized under the current share repurchase program.

Looking ahead to Q4.

We continue to see the key drivers of our Business, including mobile traffic growth, data center consolidation, growth in virtual environments, and security concerns trending in our favor.

We see solid growth in our software sales and we see strong momentum with our security products.

We also have an exciting product road map that positions us to take advantage of an expanding addressable market.

As a result, we continue to believe our prospects for long term growth remain strong.

That said, the context of a weak global economy lead us to be more cautious in our near term outlook.

With this in mind, our guidance for the current quarter is as follows.

Our revenue target for Q4 is $360 million to $370 million.

We expect GAAP gross margin to remain strong in the 83% range, including approximately $3 million of stock based compensation expense and $1.5 million in amortization of purchased intangible assets.

We anticipate GAAP operating expenses in the range of $188 million to $195 million, including approximately $24 million of stock-based compensation expense and $200,000 in amortization of purchased intangible assets.

Our GAAP EPS target is $0.90 to $0.93 per diluted share, and our non-GAAP EPS target is $1.16 to $1.19 per diluted share.

We are forecasting a GAAP effective tax rate of 35.5% and a non-GAAP effective tax rate of 34%.

We plan to increase our headcount 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 $19 million, and we believe our cash flow from operations will be in excess of $135 million.

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

Thanks, Andy, and good afternoon, everyone.

I was very pleased with our Q3 performance.

In a difficult macro environment we delivered solid year-over-year revenue growth of 21% and world class non-GAAP operating margins above 38%, and continue to strengthen our balance sheet with strong cash generation.

Our major sales -- each major sales region produced double digit sales bookings 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.

Sales of our Viprion chassis-based products were very strong with sales bookings of Viprion up over 82% from last year.

Software module sales during the quarter were also very strong and the percentage attach rate for our software sales reached a record high in Q3 driven by rapidly accelerating sales of our security software products.

Sales of our data center firewall solution grew sequentially over last quarter and we expect that momentum to continue into next year.

Our security solution portfolio now includes the most comprehensive application firewall solution in the market, the highest performing data center firewall solution for protecting large scale web-based applications, and industry leading access and policy management solutions.

I believe that F5 continues to be well-positioned to capitalize on major market trends.

Our platforms deliver an array of intelligent services for enterprises, service providers, and clouds.

Our customers use F5's technology as strategic points of control to consolidate functions on our platforms and to design and deploy our dynamic networks to efficiently deal with the ever increasing challenges presented by the growth in video traffic, evolving and more sophisticated security threats, and adoption of mobile devices.

Our product road map contains several growth drivers, including a comprehensive product refresh of all our appliances, which will deliver a very significant price performance advantage to our customers.

In addition, performance of our virtual additions for all high provider platforms will be tripled.

We also are building an eight slot Viprion chassis solution, which will leverage the centaur blades released in Q3 and set a new bar for Layer 4 to 7 performance for ADC functions, including security and optimization.

The next major release of TMOS contains significant software deliverables including DPI, DPAC inspection functionality, for the Service Provider market, as well as a market leading Layer 3 to Layer 7 firewall solution.

This integrated firewall will be a module available across all F5 platforms, allowing customers to consolidate their current firewall infrastructure while providing unprecedented performance and flexibility by allowing security policies to be applied at the network and the application levels.

The DPI functionality will be another strategic offering for the Service Provider market.

We now have a broad portfolio of solutions for the Service Provider market including our recently acquired diameter signaling products for the management of 4G LTE and IMS networks, our carrier grade NAT and IPv6 capability, and the steering functionality that derived from our sophisticated iRules running on TMOS.

We will also introduce significant updates to our virtualizations and management products which will make it easier for customers to adopt hybrid cloud architectures and optimize the delivery of web-based applications.

We continue to focus on delivering to our customers as many application layer decisions per second as possible and using that knowledge to drive orchestration applications, both real and virtual within and across data centers.

We believe these capabilities generate significant value and benefits to our customers and clearly differentiate our technology from that of our competitors.

Many companies in this market talk about performance just from throughput -- a throughput perspective, or intelligence at the application layer.

F5 not only provides the highest bandwidth, but also is the only ADC vendor to deliver application intelligence at network speeds and beyond.

As traffic and applications continue to become more web centric I believe the market is rapidly moving towards F5's sweet spot.

Our world class connection and transaction processing capabilities combined with high speed pattern matching and purpose built hardware enable F5 to deliver advanced solutions for optimization, security, and application delivery for many years to come.

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

There is no doubt that we experienced a cautious spending environment last quarter and we expect that caution to continue into this quarter.

Even with these economic headwinds, I remain very confident about the future prospects for F5.

Our technology leadership is as strong as it has ever been and our product road map will extend that leadership.

We will continue to invest in hiring world class people to take advantage of the growth opportunities in our core ADC market and to enable us to further exploit new expanding macro 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 their partners and look forward to their continued support throughout the year.

We will now hand the call over for Q&A.

(Operator Instructions) Ehud Gelblum, Morgan Stanley.

Thanks, guys, appreciate it, a couple questions.

Can you -- with the new version of TMOS coming out now, do you anticipate -- and even the new hardware platforms coming out as well, do you anticipate the new hardware platforms to gain more share than they otherwise would have?

Or see some sort of an upgrade across the product portfolio, because it would be necessary to get DPI working and some of the other features in the new versions of TMOS or is this more of a minor upgrade on TMOS?

Oh, no, right.

This is John and maybe Karl could speak after me.

But, this is very significant in my opinion, on two fronts.

First of all, the actual -- we're doing a full appliance refresh.

That's a number of significant and new products.

And, we're going to see performance increases in those appliances to the tune of about five times the current performance of the existing systems.

So, we expect that to definitely create some good growth refresh opportunities and market share with it.

We're very, very targeted at doing that.

And then, along with that, we're also coming out with the new version of TMOS that's got the software functionality with things like the firewall, full Layer 3 to Layer 7 firewall product, everything is going to be very, very competitive, along with functionality for the SP provider like DPI.

So, we really believe they're revenue generating type capabilities.

Yes, if we start looking -- by the way this is Karl, if we start looking at some of the functionality and the impact with DPI, we have a whole new classification engine that's been built up into the core of TMOS.

So, that's a very significant change.

And then, we've done a lot of other under the hood changes in TMOS to support other requirements in the search for other markets such as very specific targeted iRules.

We've done some other work there with productizing some of the carrier grade NAT features.

And, a lot of focus on IPv6 and carrying that forward.

So, there's a lot of work that's been done there.

And, obviously on the security, a lot of the development that's been done there has been extending essentially what's been done in the past.

But, really productizing things and adding capabilities around rules.

Having a new rule saying which in other things that can be applied not only at the network layer but at the application layer as well.

And then, having these things all tied together cleanly in the management framework.

So, it's a very complete and a very big upgrade to what we've had previously.

And then, thanks, as a follow-up the verticals seemed to move around a little bit.

Obviously Telco and tech were down some.

Is some of the trepidation going into next quarter, obviously it's on a big macro basis, but can we -- is it accurate to say that you were more, I don't want to say worried, but more concerned about some of those verticals like Telco and tech that came down?

I know you expected Telco to come down, it was very strong last quarter.

But, does it look as though those will stay weak going into the next quarter?

And, is that one of the main drivers behind the slightly more conservative guidance?

No, I'd say it's more overall macro than specifically in the verticals.

Typically, our verticals move around depending on projects.

And, we don't see any significant deterioration in any of the verticals.

Obviously technology has been down somewhat where they've been quite often instead of having Layer 7 type capabilities, they may have done some of their own work.

But, that's been a pretty slow process, so nothing really changing in the vertical.

Okay, appreciate it.

Thank you.

Jess Lubert, Wells Fargo securities.

Thank you for taking my question.

A question and a clarification.

For the question, can you talk about some of the demand trends you experienced in Europe?

It actually looks like the business performed fairly well from both a sequential and year-over-year perspective.

And, would like to get some additional details regarding where you saw the strength, where you saw the weakness in the region.

And, how you're thinking about Europe in your guidance for the September quarter.

And then, for the clarification I was hoping you could discuss how much revenue you received from Traffix in the period.

Yes, so, in terms of Europe it was probably what you would expect.

Some areas like the UK were very strong, France, Germany, the key geographies were pretty solid.

Europe has been very out in the lead in terms of security sales as well.

That has helped a lot.

And, to be fair, it was a pretty easy comparison versus the same quarter a year ago.

But, generally we're very, very happy with the way the team's been performing.

In terms of Traffix, yes, we did revenue.

It wasn't significant.

We really view that as part of our ADC, so we're not going to be giving that out.

I think the message I gave last quarter, and it's still the same, is we will see some revenue with Traffix next quarter as we did this quarter.

However, we really think the major opportunity is Fiscal 2013.

John for the September quarter, do you expect Europe to be up sequentially?

We haven't gone through each geography on that.

Jess, we don't guide by geography.

So, I think in our overall guidance, we're taking the European market and the macro into consideration.

And, as usual, putting guidance out there that we feel good about.

Thanks, guys.

Subu Subrahmanyan.

Thank you.

I wanted to ask a question on service versus product revenues.

If you look at the growth of the product revenues, or lack thereof, how do you expect that trend going forward given the significant difference on a sequential basis?

And, also if I could follow-up on the different verticals looking out, is there one vertical that causes you to be more concerned especially the question was asked on Telco, but if I could ask it again if it was down more than expected as a percentage of revenue?

Yes, on Telco, Telco was down as we expected, probably maybe slightly better than we expected, but not a lot better.

So, it was pretty much within the realms of what we were looking at.

And then, in terms of your original question --.

Product revenue.

Yes, the product revenue versus service.

Obviously, product revenue is our main priority and product revenue growth at 41%, service is higher than we've seen it or probably want to see it.

And, I think as we drive forward, given the guidance that we put out there we may see that stay in the same range.

But, over time, obviously our goal is to get the product revenue up.

Got it, thank you.

Sanjiv Wadwani, Stifel Nicolaus.

Thank you very much.

Just one clarification and then a question.

John, your Financial Services vertical actually performed really well which seems counterintuitive given the environment.

Can you just talk about what might be going on over there?

And then, question is as far as the progression of the quarter, can you just talk about if things weakened as the quarter was progressing month over month?

Or any clarification there would be helpful.

Thanks.

Yes, the linearity of the quarter was pretty similar to other quarters.

It was -- we did say that in our -- both our opening remarks that we did definitely see some macro environment there, but it was pretty similar.

It wasn't a significant, I mean there was some backend loading, no question about that.

But, not --.

Yes, I think just to add to that, I think if you looked at our month three, it was a little higher than we would expect.

But, I think the bigger message is in the deal flow.

It was more back end loaded within that month than we would be comfortable with.

One thing I'd like to add in there is on the backlog, where we said backlog less than one, it is interesting to note that was really roughly 1% so not a significant amount down.

But, as we do report it, I wanted to put it out there that it was down.

And then, just answer the question on the financial vertical.

We did expect the financial vertical to go up.

Again, it's similar to what I said in the previous answer in that it is very project oriented and very pipeline oriented in terms of how we do the verticals.

And, that's why we made the comments we made, so it was up.

Actually Dave Feringa, whose just been recently promoted, I'm sure you've seen that, Executive VP of Worldwide Sales, previously doing 60% of our business with North America for the last seven years, he might want to comment on some of the financials.

Not the names of the customers but some of the deals that we did.

We saw very, very large deals across all theatres last quarter.

And, specifically, in the Americas.

We saw two very, very significant deals, one from a very large bank who has also been telling people that they need to figure out ways to reduce cost to adjust themselves to their new revenue models.

And, they actually invested close to $5 million with us in a refresh opportunity to consolidate.

And then, we had another very large financial institution in the DC area that also was actually a competitive replacement that also invested almost $3 million with us.

So, even in tough times for that vertical, they're spending money where they can gain lots of efficiencies.

So, I think that was a good reason why we had a good quarter in the financial vertical.

Especially when you consider that when we talk financial, we absolutely talk globally.

So, this type of trend is happening all the time globally.

Absolutely.

We had big deals in Asia-Pac and in Europe as well.

Got it.

That's helpful.

Thanks, so much.

Paul Mansky, Cantor Fitzgerald.

Thank you for taking the question.

On the headcount front I think we were targeting about 125 in the quarter.

It did 100.

We're looking at 125 again for the next quarter.

I know you guys have puts and takes relative to hitting the bogey on any given quarter, but should we read into that 100 versus 125 as it relates to maybe how long you think the macro pressures might persist?

Definitely, as we went through the quarter, we talk a lot about how we manage expenses as we're watching the quarter unfold.

And, as we both mentioned in our scripts in this tougher macro environment as we watched it size up we got more cautious with our hiring.

But, did continue to hire and as we look at next quarter with what we think we'll achieve in terms of revenue, as you see in the guidance put out there, we think we can absorb the 125.

What I'd like to highlight in these comments is that we do want to keep hiring, because we want to invest in growth and we see the opportunity there.

But, as we've said over and over again, we will invest in a way that protects our operating margin.

And, we're committed to the 38% level.

So, I think you won't see our behavior change in how we manage the business week in and week out.

And then -- thank you for that.

If I could just follow-up, historically, you do a really good job of managing product cycles.

However, if you think about the timing of the generation of TMOS in conjunction with obviously your sweeping appliance refresh.

Is there any concern relative to demand push out around the timing of those two things happening to be coinciding a little bit more tightly than historical?

No, we -- again, I always -- I've been asked this question probably for about 10 years, as it should be.

I don't want to come over as complacent, but I feel really, really positive about the way we can manage new products coming in, typically.

In any case, our products, the existing products are refreshed, they're often redeployed so we don't often see that.

I don't think there's going to be an issue there.

The key for us is to actually get the road map on track and get these growth opportunities out there as soon as possible.

Okay, great.

Thanks again.

Jayson Noland, Robert W. Baird.

Okay, thanks.

John, just your previous comment on sales turnover, did that cause any challenges or confusion through the quarter?

I don't think we talked at all about sales turnover.

Obviously, Mark Anderson moved on and that was a shame.

But, with Dave, whose been running North America, has moved in and we've also replaced Dave by an internal recruitment as well.

So, things are basically moving.

Frankly, we're not missing a beat there.

But, we didn't comment on it earlier so I don't know where you had that from.

I was referring to at the executive level there.

Oh, I'm sorry.

Okay, now I know.

No worries.

On security, for my question, congratulations on the progress, and I guess the question is do you have what you need or can you develop it organically or should we expect some M&A there?

We are developing a lot organically.

And, we have a lot that we need, we have a lot already in the portfolio that I mentioned.

But, the stuff that's coming in the next TMOS release is very, very, very, very important.

And then, we're always looking across the market for increased opportunities.

But, absolutely, one of the things that we've been debating internally, and just how we do we do it, is in October and certainly in November at the Analyst day we're going to find a way of giving you much more visibility to the security sales that we've got.

It's not trivial because it's very subjective in nature.

So, we'll put a lot of effort into that.

And, I think most people will be pretty impressed by the rate of growth that we're seeing with security.

Thank you.

Rohit Chopra, Wedbush.

Yes, thanks, very much.

John, I'm going to ask you another question you've probably been asked a lot of times.

But, given the new version of TMOS has a lot more capability in it classification engine, and what not, how far back can you go as far as compatibility?

In other words, would you expect a greater upgrade of the base with this new version of TMOS?

And, the other question I just want to ask you about competition.

There's a little bit more competition out there, I thought maybe you could comment on that and who you're seeing and what's going on.

Yes, hi, Rohit, this is Karl.

I just wanted to mention, so in terms of software when we come out with new versions, we make that available on all of our hardware platforms to the extent that they're able to accept it.

So, multiple generations of platforms typically can be upgraded to the latest releases.

They may not run all features because of whatever limitations they have.

But, we generally make most available.

So, and that's no different for any large release that we're doing into this upcoming releases.

No different than any of the other releases that we've done in the past with regards to that.

Yes, typically, what we see there is that obviously, we see customers being cautious with a new release of software.

And, we had exactly the same reaction with 9, 10, & 11, we'll see the same coming again.

Having said that, one of the drivers to really speed up customers tends to be specific functionality.

So, if a customer is really specific in terms of the need and what they can benefit from say DPI, they will go at it faster.

But, that will be a pretty natural process.

With our chassis-based products too the nice thing there is that a lot -- our customers are future-proofed.

That is if they need more capacity for the new features for example, they're able to just add blades to the system quite easily.

So, that's already built into that.

Rohit, this is Dan Matte.

On the competitive environment front, it's the macro stories, we haven't seen really big changes.

We picked up some share actually across the core ADC market.

We've seen actually great growth in our virtual additions as well.

So, I think we're being pretty disruptive on that side of things.

Also, on the security side with the performance of our data center firewall and sales on that front, again we think we're being pretty disruptive in that market.

We look at our win rates as reported by our sales team continue to be extremely high out there, so overall, I think we're sitting quite well.

Thanks, guys.

Catharine Trebnik, Northland Securities.

Oh, hi, good afternoon.

My question is your use cases for the carrier space, can you go through those?

And, the other one would be are there any regions you're seeing carrier softness in over other regions?

Thanks.

Yes, this is Karl.

We have a number of different areas, use cases that is, in the Service Provider.

Everything from carrier grade NAT to IPv6 like I mentioned earlier, to doing things in their managed services environments, web hosting, those types of things.

Optimization, we helped optimize say video delivery of content or web applications that they're handling.

And, again, with the signaling traffic, we helped scale that, for example, we can scale diameters, sets, and radius.

We also now with our Traffix acquisition we now have a full signaling, we call it our SEC, but we now have a full diameter signaling capability, routing capability there.

So, there's a lot of areas that were leveraged in this.

And, again, like John was saying earlier, they tend to be project oriented.

But, it's a pretty big footprint there.

With the new upcoming DPI functionality, we're hoping to expand that footprint and consolidate a lot of functionality that exists in platforms that tend to be around us.

All right, another -- just a quick question follow on.

I did not hear when the TMOS version with DPI would be released.

Could you repeat the time frame?

Yes, we said at the end of this year.

Okay, and then, do you have any beta now under way with the DPI technology?

Yes, we've had, as I've mentioned before in previous calls, we've had beta versions out for a while at different various stages of the development process that customers have been looking at.

All right, thank you, very much.

Simon Leopold, Raymond James.

Great.

Thank you, very much.

I wanted to just get a little bit more clarification, particularly on the financial vertical discussion.

Quite a big number in what's a tough environment.

Are there any metrics you can give us in terms of the largest deal size or concentration?

And, really, what I'm trying to get at is to understand the sustainability versus the lumpiness of that particular vertical.

And then, in terms of the question, I'm wondering if you could talk a little bit more about the concept of virtualizing the ADC function?

In terms of the time frame of when that could be deployed?

Particularly by the technology vertical which might be early adopters.

And, what that would mean for your product portfolio and your business over, let's say three to five years?

Wow.

It's the last one.

On the last one I'm not sure if it's three to five years because that's -- I don't want to make that prediction when it's so far out.

But, in terms of the virtual ADC, we've now probably got the largest array of solutions out there from a software only perspective in terms of the ADC type solutions.

In other words, our core LTE product virtual as well as all the modules as well, security modules, optimization modules.

And, that's been going extremely well, it's still a small proportion of our business.

But, a very fast, high percentage growing portion.

We see a lot of hybrid sales.

So, we'll see sales for the software version as well as the system version.

And, the beauty is that we can manage them similarly.

So, the customer can mix and match depending on the area.

And you're right, cloud is probably the main area of opportunity there.

But, in terms of doing three to five years, that's a bit tough.

Simon, this is Dan.

So, while we're not prognosticating on the size of the -- that portion of the market, fortunately there are others who do.

And so, the target for the virtualized part of the market runs about roughly 10% of the overall market in that time frame that you're talking about.

And so, what we're doing about it is, as John said, the sales of our virtual editions are going really well.

We're giving our customers versions of our products that they can inject into cloud providers themselves.

We've also started our cloud licensing programs.

So, using the cloud vendors as more of a channel for us so they can take that functionality, if you will, and rent it to their customers on an ongoing basis.

So, that's really tapping into a customer base that otherwise we -- it would be more difficult for us to address.

And then, just going back to the financial vertical.

I mean, there's numbers in the financial vertical, obviously that vary by percents over time.

But, have been very resilient and they have been very resilient even through the 2009 time scale when that's probably the slowest era from an opportunity perspective.

So, I think it's very sustainable.

I think it's going to be one of our three key verticals for the foreseeable future.

And, any indication of the concentration or were there several very large projects or anything like that?

No, I mean Dave obviously talked about some of the projects but nothing out of the ordinary.

They tend to be reasonably big in nature but they are very common as well and as I've said a couple of times, they're global as well.

Just adding on to that, Dave mentioned a couple of larger deals in the financial vertical.

But, putting it in perspective broadly our average order size is just above a $100,000.

So, I think though we do win very significant figure dollar deals, on average, our average order size is just about $100,000.

So, I think that helps put it in perspective.

Okay, thank you, very much.

Brian White, Topeka Capital Markets.

John, when did you start to pick up signs of increased caution with customers?

We look at our business weekly.

And, you're never really sure until you get into that last month.

And then, obviously in the last couple weeks is when it becomes very specific where you can start to see committed deals being non-committed.

That's typically the process that we would see.

Okay, and I know you didn't want to talk about the weakest market in September quarter but what do you think is going to be the strongest market in September quarter?

Yes, again we don't guide out by verticals.

So, we just look at that pretty broadly and then bake that into the guidance that we put out there.

I mean, the key things we look are, we've said this a number of times, but it's definitely the pipeline.

It's definitely the factor pipeline, in other words the pipeline that is pretty mature and has a very, very good chance of closing.

And then, the assumed close rates.

And, obviously in this environment we think we are being sufficiently cautious on the close rates.

You don't think there's any change in the competitive landscape?

This is all macro caution?

There's always some change in it but do I think it's significant versus macro?

No.

Okay, great, thank you.

Our next question comes from the --.

This is John Eldridge.

We're going to take two more questions and then we're going to end the call.

Absolutely, sir.

Kent Schofield, Goldman Sachs.

Great, thank you.

Can you talk a little bit about increase in the performance availability on the software ADC side, some of the cloud features?

And then, how that plays out with selling into some of those technology customers that are doing some of their own work?

Thank you.

Sure, so Kent, this is Dan Matte.

It's a couple of things.

So, one with the virtual additions themselves, we are going to be increasing the performance.

We think we already have great performance within our virtual additions but we'll crank that up even more.

Another aspect that we're working on too is allowing people to string multiple versions of those together and act as one coherent unit too.

So, as we think about many of these larger players and thinking about having a totally software defined data center, if you will, so everything looks the same inside of it and you're changing the personality of the devices solely by software, we think that we've got a very interesting way to help them do that and utilize our software from that perspective.

The other piece that I mentioned too is different go to market models as well.

So, we think there are other ways to exploit and better get our products into what I'd call the serverless generation.

So, people coming up with new companies who are not likely to build their own data centers or purchase servers or anything like that.

They are just going to be renting infrastructure from various players out there.

So, we want to make sure we've got that covered.

And then, also we recognize that people have different ways of adopting cloud technology.

And, whether they are doing it internally in private clouds or, as I said, the serverless generation purely in a public or those in between with hybrid.

So, we definitely have technology coming that allows people use as much or as little of both of those or simultaneously use both as they would like.

And, make it seamless so that the cloud is just another resource that they are able to draw upon.

Great, thank you on that.

And then, you mentioned the high attach of software modules.

Is that a level that you think it's where it's going to be?

Or do you think with the coming product sets that you could see higher attach going forward?

I think we can see higher attach.

It's a number of things.

I mentioned security, the application firewalls is a very good example.

And, the access policy manager for access.

They are two very, very strong momentum modules right now.

But, as we add more modules like DPI, like the bigger function firewall is coming, I think you'll see more module connect.

And then, the other thing that's critical is sales execution in this area, sales and SE and service execution where not just -- we started off with North America being the leader, but we're now seeing areas like Japan, the rest of APAC, Europe also doing extremely well with the modules.

And, realizing it's a differentiator.

And then, the fact that we have our Viprion chassis solutions, that are ideal for building more and more modules on the one platform.

So, I do, I think it's the right strategy and it should increase the attach rate.

Great, thank you.

Ryan Hutchinson, Lazard Capital Markets.

Thanks, I have somewhat of a follow-up on just the overall security strategy.

And, John, you touched on it in the prepared remarks.

Maybe it's a question for Dan or Eric, if he's there, but I just wanted to understand where we're headed here.

You clearly are looking to buildout a comprehensive solution.

You're covering some aspects of it but I just want to get -- where are we in 12 to 24 months?

Do we cover network protocol, app, and access security?

And, is Project Topaz does that fulfill the needs or is there more to come beyond that?

And, I guess the real question is who ultimately are we going to be competing with?

Thanks.

So, this is Manny Rivelo.

So, Ryan, let me answer that question.

A couple of things.

First of all we have two major use cases, if you will.

One is really around what I would call unified access.

And, around unified access is the whole concept of ensuring that we know who the user is and we contextually can create an identity of that user.

Identifying the who, what, when, where, and how of what that user's trying to do.

And then, enable them to access those services whether they be on network or off network.

So, that's a very strong use case.

We've been meeting a lot of market share there and just recently was reported by Infonetics where we moved to the position number two from market share perspective.

The other use case that we've been working a lot, which is around Project Topaz, is really a web firewall defending your applications.

And, that is a Layer 3 through Layer 7 firewall technology.

It's high performance, high throughput, high connection count, high-high concurrent connections.

And, what that basically has is everything from Layer 3 DDoS protection all the way to application vulnerability protection, all wrapped up in one solution set.

And, that by all means is a product that we currently have in the market, widely successful with that market.

And, we're going to continue to create further integration with Project Topaz in the next software release.

So, if you think about the competitors across those two different markets, on one end we're competing against identity bridges and vendors of that size.

And, in the data center firewall we're competing against Juniper, Cisco, Palo Alto.

But, to be perfectly frank, none of those companies have focused on a web solution set.

So, although they are competitors, they are not really the right solution in the market at this time.

The other thing I'll add, you asked a question about the next 12 to 24 months.

Obviously, this is a starting point.

We've got other areas we're going to build on.

We have some other significant things we're building into the platform itself such as DDoS adding significantly to our hardware capabilities there.

A lot of security features in ASM, things in the future we're looking at malware prevention.

There's a lot of factors that we can go after.

But, once we have this footprint, this capability and this performance, that's the big enabler.

Okay, thank you very much for joining us and we look forward to speaking with you all again next quarter.

We'll see you on the road sometime soon.

Thank you.

Thank you for your participation in today's conference.

You may now disconnect.