F5 Inc (FFIV) 2014 Q1 法說會逐字稿

Good afternoon, and welcome to the F5 Networks first quarter 2014 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, and welcome all of you to our first quarter fiscal 2014 conference call.

The speakers on today's call are John McAdam, our President and CEO; Andy Reinland, Exec.

VP and Chief Financial Officer.

Other members of the executive team are also with us to answer questions following John and Andy's prepared comments.

If you have any follow-up questions after the call, please direct them to me at 206-272-6571.

A copy of today's press release is available on our website at F5.com.

In addition, you can access an archived version of today's live webcast from the events calendar page of our website through April 23.

From 4:30 PM today until 5:00 Pacific time, January 24, you can also listen to a telephone replay at 866-452-2104 or 203-369-1210.

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 certain uncertainties and risks 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 in our SEC filings.

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

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

Thank you, John.

In the first quarter of fiscal 2014, we continued to see solid returns on the investments we made last year.

The growing demand for our new hardware and software products, positive response to our recently introduced Synthesis architectural vision, and our new pricing models all led to above-expected sales in each of our major geographies.

Revenue of $406.5 million was above our guided range of $390 million to $400 million, an increase of 3% from the prior quarter and 11% year over year.

GAAP EPS of $0.87 per share was above our $0.81 to $0.84 guidance.

Non-GAAP EPS of $1.22 per share also exceeded our guided range of $1.17 to $1.20 per share.

Product revenue of $218.6 million grew 3% sequentially and 7% year over year, representing 54% of total revenue.

Service revenue of $187.9 million also grew 3% sequentially, 17% year over year, and accounted for 46% of total revenue.

Accounting for 56% of the total, revenue from the Americas was up 6% from the first quarter of fiscal 2013.

EMEA, which represented 24% of revenue, grew 17% from the first quarter of last year.

APAC accounted for 15% of revenue and grew 19% year over year.

And Japan revenue, which grew 17% from a year ago, was 5% of total revenue for the quarter.

Enterprise customers represented 61% of sales during the quarter, service providers accounted for 24%, and government sales were 14% including 7% from US federal.

In Q1, we have three greater than 10% distributors -- Ingram Micro, which represented 17.9% of total revenue; Avnet, which accounted for 14.3%; and Westcon, which accounted for 13.5%.

Our GAAP gross margin in Q1 was 82.1%.

Our non-GAAP gross margin was 83.4%.

Our non-GAAP gross margin declined sequentially, a result of lower service gross margin, which reflects our increased investment in consulting, while our non-GAAP product margin remained essentially flat with Q4.

GAAP operating expenses of $224.4 million were within our target range of $219 to $226 million.

Non-GAAP operating expenses were $193.4 million.

GAAP operating margin was 26.9%.

Our non-GAAP operating margin was 35.9%.

Our GAAP effective tax rate for Q1 was 37.8%, and our non-GAAP effective tax rate was 35.1%.

Turning to the balance sheet.

Cash flow from operations was $158.9 million.

In Q1, we repurchased slightly more than 2.4 million shares of our common stock at an average price of $82.35 for a total of $200 million.

We ended the quarter with approximately $1.24 billion in cash and investments.

With the addition of $500 million authorized by the Board for stock buyback at our most recent Board meeting, approximately $781 million remains authorized under our share repurchase program.

DSO at the end of Q1 was 49 days.

Inventories were $19.1 million.

Capital expenditures for the quarter were $5 million.

Deferred revenue increased 18% year over year to $567.7 million.

We ended the quarter with 3520 employees, an increase of 165 from the prior quarter.

Based on growing demand for the new products we released in the fiscal year 2013, the strength of our security offerings, solid momentum with our Traffix Diameter solutions, and positive customer response to our Synthesis architectural vision, we feel very confident about our ability to continue to grow the top line and anticipate continued sequential growth through the remainder of the fiscal year.

For the second quarter of fiscal 2014, our revenue target is $408 million to $418 million.

We expect Q2 GAAP and non-GAAP gross margins to be consistent with Q1.

GAAP gross margin is anticipated to be in the 82% range, including approximately $4 million of stock-based compensation expense and $1.7 million in amortization of purchased intangible assets.

Non-GAAP gross margin is expected to be at or around 83.5%.

We anticipate GAAP operating expenses in the range of $226 million to $233 million.

This includes approximately $31.5 million of stock-based compensation expense and $0.4 million in amortization of purchased intangible assets.

For Q2 we are forecasting a GAAP effective tax rate of 38% and a non-GAAP effective tax rate of 35%.

Our GAAP EPS target is $0.87 to $0.90 per share.

Our non-GAAP EPS target is $1.23 to $1.26 per share.

We plan to increase our headcount by over 100 employees in the current quarter.

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

We expect inventory levels within a range of $20 million to $22 million.

And we believe our cash flow from operations will be at or around $80 million, reflecting the large sequential increase in our federal tax payments that we normally incur in our fiscal second quarter.

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

Thanks, Andy, and good afternoon everyone.

I was very pleased with our performance in Q1.

The improved product revenue growth that we experienced in the second half of fiscal 2013 gained more momentum in our first quarter of fiscal year 2014.

All our major regions met or exceeded their sales internal forecast.

From a sales perspective, the star of the quarter was the EMEA region, where we saw strong sales growth across most of the region.

The Americas region had another strong quarter, and the majority of territories in our Asia-Pacific/Japan region also delivered solid results.

Once again, our services business produced excellent results, including a significant increase in deferred revenue, which grew approximately 7% sequentially over the last quarter and is now over $550 million.

I was very pleased with the sales momentum we are seeing as a result of the extensive product refresh we introduced during fiscal 2013.

The new product line already accounts for the majority of our ADC sales and has equipped our sales force and partner channel with the most functional and competitive ADC solutions in the market.

These new products, combined with our new pricing and softwaretiering strategy Good, Better, Best are proving to be very popular with our customer base and very competitive in new business opportunities.

It is early days with the Good, Better, Best go-to-market model, but initial sales have exceeded our internal expectations.

And the most functional tier, the Best category, are proving to be the most popular, which could increase our software sales as this trend continues.

The Cisco ACE installed base continues to be a significant replacement opportunity, and Q1 was another solid quarter with a large number of project wins.

Our competitive win rate in this area continues to be extremely high.

As I mentioned before, we continue to see the pattern where our customers tend to include additional functionality including security, access control, and application acceleration.

And we are already seeing examples for the new range of F5 products combined with a Good, Better, Best pricing strategy reinforces this trend.

We introduced our Synthesis architecture for software-defined application services last quarter.

The F5 Synthesis architectural vision has been very well received by our customers, our channel partners, and has gained wide support from technology and industry leaders.

Synthesis helps customers improve service velocity and accelerates time-to-market through automated provisioning and intelligent orchestration of application services.

The Synthesis architecture is based on an elastic, high-performance fabric which reduces the cost and complexity of deploying software-defined application services across all types of systems and environments.

These environments include software-defined networking, virtual infrastructures, traditional on-premise data centers, and both public and private clouds.

We had another solid quarter with sales of our security solutions.

Security continues to be the major driver of our business, with strong sales across the securities solutions portfolio including ASM, APM, and AFM.

We are also building out two world-class security operations centers in Seattle and Tel Aviv to support a new online security service from our Versafe acquisition.

Versafe adds some very strategic solutions to our security portfolio.

The WebSafe and MobileSafe services include state-of-the-art technology for Internet, anti-fraud, anti-phishing, and anti-malware solutions.

We plan to formally launch this subscription-based service at the [RSU/RSA] in February, and we will be announcing the availability of WebSafe and MobileSafe services, including our channel partner program.

We have already seen significant amount of interest in these subscription-based services.

We will also be announcing a new secure Web Gateway solution at RSA, and obviously we will publish more details at the event.

We experienced strong sequential and year-over-year growth in sales to the service provider market last quarter.

We won several large contracts for traffic management and signaling delivery controller applications related to 4G LTE deployments.

We recorded a record quarter of purchase orders for our Traffix SDC solutions, including sales to tier 1 service providers in both Europe and in the USA.

Actual revenue in Q1 from the SDC sales was relatively modest, but the increase in orders bodes well for revenue growth in future quarters.

In addition, we are starting to see an increase in carrier-grade NAT wins now that we've enhanced the functionality and feature set of our carrier grade NAT solution.

I'm very excited about our technology direction and the proposed deliverables on our product roadmap in the short, medium, and long-term.

Our product roadmap priorities align well with the trends in the many areas of our business focus.

You will see F5 continue to introduce significant enhancements and world-leading technology in our key areas of focus -- security, service providers and mobility, the cloud, and software-defined application services.

Just this week, our product development team have delivered our new TMOS Vancouver release to manufacturing.

TMOS Vancouver is a very major release and includes over 130 significant new features.

These features include a secure Web Gateway solution, major performance enhancements to our virtual ADC software, and utility billing features.

Support for new hardware architectures; major enhancements to our service provider products including the Gi firewall, the policy enforcement module, and our carrier-grade NAT solution.

Vancouver and our most recent version of BIG-IQ also include significant improvements to our centralized management solution for our firewall solutions -- AFM, DDoS protection, and ASM.

As far as the outlook is concerned, Andy indicated that we continue to expect to deliver sequential revenue growth each quarter of fiscal 2014.

Obviously, we remain cautious given our experience from the March quarter last year.

Having said that, we feel very positive about our market opportunities, our competitive leadership, and the overall trends we are seeing with our business.

Our pipeline for future business is very strong, and the market drivers continue to be robust.

We believe we have several tangible growth drivers for our business, including the new product refresh, the momentum in our security business, and increasing range of solutions in our security portfolio.

The opportunities being presented with 4G and LTE rollout for our consolidation strategy and competitive leadership of our traffic to SDC solutions.

In addition, our Synthesis architecture for software-defined application services provides F5 with the opportunity to play a very strategic role as customers continue to strive for competitive advantage and maximum agility by moving to new technology architectures.

Q1 was a good start to fiscal 2014, and I feel very optimistic about our business prospects for the remainder of the year.

In conclusion, I would like to thank the entire F5 team and our partners and customers for their support last quarter, and I will now hand the call over for Q&A.

(Operator Instructions) Brian Marshall, ISI Group.

Great.

Thanks guys.

Nice quarter and great guidance.

Question with respect to sort of ranking the new incremental opportunities for calendar 2014.

Could you rank order them between the securities, the refreshed hardware, as well as the new initiatives like global and LTE?

Yes, and a lot of these are interconnected, Brian.

A lot of them.

But if I was going to say anything, I would say security across the board.

Interestingly enough, security in this service provider space is a massive opportunity in our opinion.

I've said in previous calls and we've talked about this that frankly our roadmap has been driven a lot by some large service provider input in the USA in particular.

So I think security is probably the top.

Traffix, we are very happy about.

We're pretty excited about Versafe.

I mean, it's early, early days; we haven't announced it to the sales force yet.

That will be happening at [RSU/RSA] but that could be -- the interest level, we know, is already high.

We just want to get ourselves right.

ACE is going to continue to be an opportunity throughout the year.

And, obviously, the product refresh is at the base of that.

The other sort of wild card is the pricing that we talked about.

And, of course, Synthesis architecture is more about making sure that we're incredibly relevant, as these trends move pretty fast, whether it's to the cloud or software-defined solutions.

Great.

Thanks, John.

Nice quarter.

Subu Subrahmanyan, The Juda Group.

Thank you.

John, could you talk specifically about the Carrier firewall opportunities?

You've mentioned that a few times as being very good opportunities in terms of success and, specifically, firewall applications.

And also could you talk about virtual as a percentage of revenue, how that did for this quarter?

Thank you.

Yes, so I'm going to turn it over to Manny, and he will talk more about the security in the service provider space.

But I know enough about it just to give an overview.

There is -- the service providers are -- obviously, security is changing dramatically.

A lot of it is application-type threats.

But specifically in the service provider space, we're talking about trying to reduce costs in an environment where the volume is increasing dramatically, obviously driven by mobile, and that's where we really excel with our new solutions.

So the core product is there, and what we've been building and helping with the input of customers is a lot of feature set into the BIG-IQ orchestration engine so that we can scale in those environments.

And we feel very, very good about that.

Trials are underway, and we think it is a big opportunity.

Manny?

Yes, I think just to add, a quick data point on that would be that we've been specifically building the Gi firewall, which is basically a firewall that sits in the packet core, whereas a radio network turns over to Ethernet.

And what service providers' need there for mobile carrier growth is devices of high performance.

And high-performance not only in high throughput, which we achieve, but high connection counts.

And high connection counts are a function of all the mobile users.

And then what they're looking for is basically firewall functionality, DDos protection, application protection.

So the types of features that we've been putting in there.

So it's feature richness at very, very high performance and very high connection counts.

And our platforms are well suited to accomplish that.

And as far as the VE question is concerned, we don't separate out the number.

However, it did grow faster than our core system business, and we expect it to keep doing that.

Still relatively small numbers.

As far as we are concerned with Synthesis, we see software and systems together; we can manage them together, we can cluster them together.

They are just part of the overall solution that we've got.

But yet, it did grow and we expect it to keep growing.

And I think as customers move more towards the cloud, I think that's the trend.

We'll make that happen.

Okay.

Thank you.

Ehud Gelblum, Citigroup.

Hey, guys.

Thank you, appreciate it.

So a couple of questions.

First of all, I know you are no longer diving deep into the different verticals you have.

But I just want to get a sense following up on the virtual question, if we can get a sense as to how Internet guys in cloud, kind of how that fared, and whether that as a percent of your revenue is going up.

And then I may have missed the answer to the virtual question.

If you have some sort of a percentage there, that would be helpful.

I was looking more for kind of how is the revenue trending customer-wise into that customer set.

And then, John, you'd mentioned that Diameter was still small, but it sounds like you're very excited and the order growth is there.

I'm wondering as we look out and model it, by the end of this fiscal year -- or the end of this calendar year, let's say, could it get -- could Diameter get to be 5% of your product revenue?

Is it something that could be that large, or is it still going to be small and it's much more of a 2015 revenue contributor?

Right, right.

So regarding the verticals, I mean, the technology vertical has been fairly stable.

I mean, it tends to -- it's a bit like a server provider base, so it's lumpy in nature, but it's still a sizable amount.

The one thing I will say about the verticals is just to be clear, when we talk about -- obviously, we give out numbers and revenue on verticals.

Our actual enterprise business, which includes the technical vertical, was actually pretty solid from a sales perspective.

So we feel pretty good about that, especially in North America.

So no concerns there.

No certain major trends.

The cloud is obviously -- that is increasing will continue to increase, and we're putting more focus in terms of doing that.

You know, we've announced some -- we actually did some press releases with some cloud partners recently, but we're in most of the big ones that you might expect.

And the other question was --.

Oh, on Diameter growth.

Oh, on Diameter.

Yes, yes.

Yes, so absolutely.

I mean, we did -- the actual revenue in Q1 was modest is the word I used, and that means it was pretty small.

However, the number of orders was actually quite significant in terms of our win rate.

We actually had replacements as well and some tier 1 scenarios.

So I'm not going to say what we think it can be, but we definitely -- assuming that we produce a good we meeting the milestones, because some of these orders are multimillion dollar orders, then we would expect it to be definitely material as we get to the second half.

John, back on the virtual question.

Can you give a percent of -- that you sold into virtual?

Is there way you can look at that?

No, Ehud, we don't break that out at this time.

Okay.

Could we say it was up?

Karl has something here.

Ehud, this is Karl.

I was just going to mention, you know, we put a lot of effort on our virtual side in this last release in terms of significantly increasing the performance of the virtual additions.

And we're not stopping there.

We have plans to take them up another notch as we go forward.

We have different footprint options in terms of size, so you can buy a very small 25-megabit -- or megabyte instant that you can use for certain circumstances in the cloud, or you can go with much larger footprint options.

We have new licensing models with utility billing, we're leveraging BIG-IQ actually as a license server, so you can do pooling.

So there's a lot of effort.

There's a lot more than that.

So when we talk about being able to operate in the cloud, it's a very vertical effort in terms of our technology.

It's not just about doing kind of [piece] things to modules or other components.

Great.

Thank you.

Alex Kurtz, Sterne Agee.

(technical difficulty) Sorry about that.

I was on mute.

So John, just as a follow-up on the Web scale question that was just asked.

I think there's been some concern historically that those customers are sort of changing their architecture and moving away from branded vendors.

Do you feel like you maybe have troughed that event in your pipeline?

Looking back the last 12 months and going forward, that's sort of out of your expectations and don't really have a lot of growth expectations in those big Internet data center hyper scale kind of customers?

No.

I'd say -- I mean, the reality is we're talking about two customers.

One wasn't a customer -- well, two organizations that have done some specifics in a very specific environment with a very, very significant workforce are able to do it.

We haven't seen any more.

And so we still see big opportunities in that market.

Across the board, security for example is a big, big opportunity in [all] the ones.

So that's a key, key vertical for us that I don't believe has troughed at all.

Okay.

Thank you.

Jess Lubert, Wells Fargo Securities.

Hi guys.

Thanks for taking my question, and congratulations on a nice quarter.

Two questions.

First for John.

I wanted to dig into the service provider businesses.

Specifically, I was hoping you could talk about how some of these large carrier transactions may flow through the model through the course of the year.

And perhaps you can help us understand how you're thinking about March quarter seasonality here.

That this has often been weak in the March period and sometimes lumped down following big quarters.

So I was hoping you could help us understand if the expected timing of big deals is giving you a little bit more confidence that we may not see the level of March quarter seasonality in the Carrier vertical like we saw last year.

And then for Andy, questions on the gross margin, which dipped about 50 basis points sequentially.

I just wanted to confirm that the product gross margin remained unchanged and to better understand how much of the incremental investment in consulting services had already taken place and how much was still to come.

On the service provider space and last quarter last year -- so first of all on the service provider space in terms of some of the linearity, as I said, we do expect it to be material from the Traffix sales in the second half.

We will see improvement as well, we're pretty confident of that, in this current quarter as well.

But, you know, it's interesting.

I mean, you can imagine that we've spent a lot of time looking at our business, given the results of the March quarter last year.

And not just in the service provider, but across the board.

To be fair, we haven't really seen seasonality as such in the service provider space in the March quarter.

And by that, I mean it was horrible last year, and it was awesome the year before.

In fact, if you remember, it was a 27% quarter in the March quarter the year before, so the comparison was pretty tough.

We still believe it's going to be more about project in our forecast, and we feel fairly solid about what we've done in terms of vetting the sales force about that.

So I don't think we're going to see the same issue.

Yes, and then on gross margin, yes, I did say the product margin was down just a little bit; I think six basis points.

Really nothing to that.

We didn't see any change in the competitive landscape or change in discounting at all.

And I also said in my comments that we think that, for the next quarter, it's going to stay at this level.

And on the services side, we had a great hiring quarter in Q1.

And pretty weighted on the services side.

You know, that upper 30% -- we're usually -- we're a little below 30%.

A lot of that was consulting.

So that pulled that margin down, and now it's time to put that consulting to work.

I also said I think in this quarter we're going to be pretty much the same level on the services margin, and we're going to try to manage it at this level throughout the year.

Thanks, guys.

Keep up the good work.

Thank you.

Amitabh Passi, UBS.

Hi.

Thank you.

Andy, I just wanted to confirm the percentages you gave us for service provider, government, and enterprise.

If I did the math correct, it seems like service provider was up quite dramatically sequentially.

So just trying to understand were there any big deals that came through.

And it doesn't seem like you saw the normal sequential decline in the worldwide government sector.

So, again, I just wanted to confirm if we have the numbers and the directions right, and maybe if you could explain some of the dynamics.

This is John, actually.

Let me address it, and if Andy wants to jump in he can.

But, yes, we saw a whole bunch of large service provider deals in the quarter.

Most of them in our core business, most of the revenue -- that's why I mentioned about the modest in the Traffix area.

A lot of it related to 4G LTE.

Interestingly enough, most of the success was actually outside the Americas.

The Americas had a decent quarter, but some of the increases came in Asia-Pacific, Japan, and EMEA.

We had very strong sales there.

Remember the other comment I made about generally from a sales perspective, our enterprise business was pretty strong as well.

It's when you look at the backlog mix that happened, it was a little bit slanted towards the service provider.

But also typically, and we see this quite often is that when we have a very strong federal quarter at the end of September, you get orders that are right in at the end of September.

Some of that federal business went into backlog and shipped as well, which was probably took that up a little bit more than it normally would.

And John, just as a follow-up.

On the security side, particularly in the Carrier space pertaining to the Gi firewall, who are you running into most often, and who do think you're taking share from?

Juniper has definitely -- they have got a very large install base.

We think that, specifically, and service provider is a big opportunity for us.

Okay.

Thank you.

Brian White, Cantor Fitzgerald.

Yes, John, it looks like Diameter signaling business is at some type of an inflection point.

I know you said the revenue was modest, but it seems like we're looking at a attractive trajectory going forward.

And I'm just wondering how do we think about where you're seeing activity in terms of geographically?

And also are deal sizes bigger or smaller than the traditional BIG-IP business?

Yes.

I mean, first of all, yes, the deal sizes tend to be projects, and hence the revenue versus the sales orders discussion.

They tend to have milestones associated with them, and they tend to be bigger -- actually, fairly significantly bigger, actually.

We think that [we're] the best technology out there; that's key.

We really believe we have the best technology.

We need to watch this because, you know, there's some big companies out there with some good R&D, and we're making sure we stay ahead in technology.

I do think it's come to a bit of an inflection point, actually, from a sales wins perspective.

I think it's really done that.

It's now all about cementing those wins and increasing more business.

And is there any particular geography that stands out where you are seeing more activity?

So Brian, this is Manny.

Let me just add so we're seeing it in all geographies.

Obviously, all providers are moving toward LTE 4G networks, and the next two years we're projecting to see almost all of them go to that.

So we're seeing it across the board; we're seeing it in Europe, we're seeing it in Asia, and we are definitely seeing it in the Americas, which probably led this 4G movement was led by the Americas.

But to John's point on the technology leadership, our portfolio solves problems that most of the portfolios in the industry don't solve.

We provide both DRA, DEA, and interworking functionality, and support over 30 of the Diameter signaling protocols that are out there, which allows us to really interoperate with just about any service provider with just about any component that's out there.

So that's what's getting us a huge competitive advantage.

And then part of the challenge, as you very well know, this is going into a very strategic part of their network.

Consequently, proof of concepts take a period of time to make sure that they're working inside those environments.

And then over time, there's acceptance criteria, which leads to consulting work that we need to continue to do so.

We're pretty excited about the win so far, and we continue to see incremental orders from those that we've one won as well as new business.

So hopefully [20] -- the rest of this year will play out, and 2015 will even be more successful.

Great.

Thank you.

Rohit Chopra, Wedbush.

Thanks very much.

Just wanted to ask John has there been any revenue through the Cisco partnership yet or any engagements that you could talk about.

That's the first question.

The second one is for Andy.

As far as -- and I know you have to wait for the announcement at RSA, but as far as the building out of the operations centers for the new subscriptions security product, does that have any impact on the model from an expense standpoint near-term?

And then when do you think the revenue impact actually hits the model?

On the Cisco partnership, we've been focusing on technologies, links, and roadmap with them, as we have been doing with VMware as well.

Where there have been engagements -- tactical engagements and geographies, we've seen that in the past.

I actually said that in the last call.

So I wouldn't really call that out yet.

Yes.

And on the SoCs that we have in Tel Aviv and Seattle, yes, there's an upfront investment there.

Some of it in particular in Seattle is CapEx, so it would be recognized over time.

And the staffing with Versafe coming in, we had a level of staffing there.

So we're going to be adding to that and getting them trained up in anticipation of orders.

The thing to point out here for revenue is this is going to be a subscription model.

So really what you're going to see over time is that buildup of subscription on the balance sheet that then we'll recognize over time.

So I think it will be a slow take-up.

But the main message is, yes, it's an upfront investment but one we think that we can manage in our current gross margin structure.

Thanks, Andy; thanks, John.

Kent Schofield, Goldman Sachs.

Hi, it's Justin Jordan filling in for Kent.

Two questions.

How should we think about hiring going forward given the -- you hired a little bit more than expected in this past quarter.

And then also are there any new Cisco displacements to announce, or where -- are you getting -- how much traction are you seeing in the market with that?

Yes, so on the hiring front, we said on our last call that we plan to be pretty aggressive on hiring, and we did.

We had a great quarter this quarter at 165.

For the second quarter, we are going to bring those people in and get them on-boarded.

That number will pull back a little bit.

We said we're going to be over 100 this time, but I wouldn't read anything into that.

It's just bringing people on, managing the expenses as we go forward.

But I think you're going to see us continue to be pretty aggressive with particular focus on sales.

It's just we're going to want to crank up the sales force as we see these opportunities developing.

Yes, and on the ACE opportunity, it still remains to be very strong.

We saw some more Fortune 500 wins, brand-new, which is clearly good because we tend to sell a lot into those accounts.

We also saw -- typically North America had been leading the parade, but we're starting to see that happening in Europe and Asia as well.

So as I said earlier actually, I think it's probably a two-year, at least, opportunity.

Okay.

Thanks.

Simon Leopold, Raymond James.

Thank you.

I wanted to see if maybe you could provide a little bit of perspective from a macro following on IBM's commentary last night that as a bellwether was somewhat uninspiring, and Cisco's guidance last month somewhat uninspiring.

You're selling into similar markets in terms of data centers and tech.

Maybe just if you could step back and sort of help folks understand how you are different than what the bellwethers are indicating.

Thanks.

Yes, there's a couple of things, and obviously I can't talk for these companies.

I don't know as much details probably as you do.

However, I know that they have [referred] to emerging markets.

We haven't seen that.

We have said that in the past that China is a top market.

It actually continues to be that in this current quarter.

But overall, we're actually happy about the emerging markets.

A lot of that is driven by security and mobility -- mobility specifically -- in emerging markets.

So I don't think we've got the same issues.

I think the other thing is that we embraced the whole concept with our Synthesis architecture and before that with the way the R&D was to enter the whole software portfolio that we have.

I think that's [standing] us very well moving forward in terms of being very relevant to the technology trends of software-defined networking of the cloud.

So I'm not sure we're quite in the same example as some of the much larger companies.

And just one clarification.

Last quarter, you talked about operating margins in the back half of the fiscal year of being in the upper 30s.

I just want to revisit and see if you can confirm that's still true.

Yes, we did make that statement, and we made no change to that.

Great.

Thank you very much.

Operator, this is John Eldridge.

We're going to take two more calls and then wrap it up.

Mark Sue, RBC Capital Markets.

Thank you.

John, if I look back a year ago, things were pretty tough.

The Company was growing in mid to low single digits.

I think you classified as a year of two halves.

Now we're seeing this reacceleration.

And the simple extrapolation is that F5 has new products, so you're seeing some catch up of delayed purchases as you now have a refresh.

Or do you feel it's more expansive than that, perhaps the ADC market is becoming more important virtualization is reaccelerating?

So maybe how that all ties into some [qualitative] thoughts of larger deals, architectural projects, and how that's shaping for the whole year so that this is not just a transitory new-product refresh.

Okay.

I'll leave Manny to talk about the ADC market and what he sees there in other parts of the question.

But I do think -- I mean, we've obviously looked at this a lot, given a year ago.

We've done the product transition.

We couldn't really put a number out there in terms of what the issues were from a delayed perspective, but it's pretty certain there was a significant number of that's over.

Traffix has obviously started to build some momentum.

Our security portfolio solution has increased dramatically.

I think that's something to remember.

And also our [name] in security has increased dramatically and our channel's ability to execute.

So there are some really key issues I think are very, very different from last year.

What I would add, Mark, to it is the ADC market has grown a lot and changed a lot over the last five years where I think if you go back five years ago, it was predominantly a traffic management market.

And over the last five years it's consumed a lot of new services.

Services to not only make applications available but also make them secure and make them faster, if you will, given more performance characteristics.

Because the result of that, the relevance of that ADC market has grown, whether it be on-prem or in the cloud or a hybrid environment.

And that's really what we're seeing.

And our strategy that we've been implementing with Synthesis is actually to do that -- to create a set of services that sit on top of any network fabric that are highly elastic that enhance that user application experience making it fast, secure, and available.

No matter where the user may reside, on-prem and/or at home or on the road.

And that's really been what we've been focusing on, and we're seeing that seeing that pay off in the market.

Not only in the traditional enterprise markets but also in the service provider market because a lot of what you're seeing happening in the service provider market is monetization strategies where you're trying to move more applications to those mobile devices.

So I think the ADC's importance is growing and rapidly in all the new architectures that are out there.

So a lot of it does point to sustainable trends I guess from John and your comments, Manny?

Yes, I believe that there is these large sustainable trends, and you'll see market shifts occurring over the next decade.

Okay.

Thank you, gentlemen.

Tim Long, BMO Capital Markets.

Sure, thanks for getting me in.

Andy, one for you and one for John.

Andy, a little bit more aggressive cash usage in the quarter on the buyback.

Pretty good price that you got it at relative to where it's at now.

So was there -- and with the incremental allocation here -- any change in philosophy on buyback?

Should we expect more healthy levels like we just saw this last quarter on the buyback going forward?

And then John just curious on the product refresh impacts.

I think you mentioned the ACE replacement and Traffix and security as really long-term trends.

How long do you think the product refresh from the last 12 or 18 months can help results, and when do you think we'll need maybe to touch up some of those products in the portfolio?

Thank you.

Yes, so on the buyback, you're right.

It definitely was a much stronger buyback given the share price as the Board set price targets that triggered through the quarter and I think took advantage of a good opportunity for us to act on that.

And then, you know, we're going to continue to execute with the Board.

Based on the 10b5-1 plan that puts price targets in place, I think the increase of $500 million sends a message.

We'll see how that executes out.

But they approved it, and so we're going to take that direction and set our 10b5-1 and go accordingly.

And then regarding the product refresh, if you look historically, it's certainly been two to three years of growth that we've just assigned directly to that.

No reason to think that's different.

The other thing, just while I'm on the subject, but I also -- we feel it's so early days.

A little bit cautious saying this, but it was the Good, Better, Best pricing I think is going to go hand-in-hand with that, obviously from a software module perspective.

The other thing the lesson we've learned big-time is that when we do the refresh the next time, it will not be as elongated.

In other words, it won't take over such a long time as we've done before.

And we'll probably going to be more aggressive about the time between the refresh, and Karl might want to comment on that.

Yes, I talked about this at the analyst day, but we are going to be definitely -- we've already actually started our design cycle in terms of looking at the roadmap and we're going to be refreshing the appliances.

But having said that, we're also introducing every release -- new hardware, new variants of our platform.

So we just released the 2250 blade, the new high-end VIPRION blade that runs over almost 4X performance in layer 7. It's got a bunch of other features with multi-tenancy and other things.

And we have new hardware that will be coming out in each release as we go forward, including some upcoming ones later this year.

So we're continually adding to our high end.

We're continually adding to the platforms but we will be starting in terms of when we start refreshing things.

We'll be refreshing them at a different cadence.

And part of our cadence is aligning with some of our component vendors to make sure that we are right at the cutting edge of when they are releasing their next-generations of components, and so that we're aligned with that.

And we were -- part of that last release was that alignment, and we think we're in that cadence now that we can drive towards so.

Okay; thank you.

Okay.

Thank you very much for joining us.

And again if you have any follow-up questions, please don't hesitate to give me a call.

Thank you.

Talk to you next quarter.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.