F5 Inc (FFIV) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the F5 Networks second-quarter 2014 financial results conference call.

(Operator Instructions) Also, today's conference is being recorded.

If you have objections, please disconnect at this time.

I'd now like to turn to call over to Mr. John Eldridge, Director of Investor Relations.

Sir, you may begin.

Thank you, Brian.

Welcome to all of our listeners to our conference call for the second quarter of fiscal 2014.

John McAdam, President and CEO; and Andy Reinland, Exec VP and Chief Financial Officer, will be the speakers on today's call.

Other members of our exec team are also on hand to answer questions following our prepared comments.

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

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In addition, you can access an archived version of today's live webcast from the events calendar page of our website through July 23.

From 4:30 PM today until 5 PM Pacific Time, April 24, you can also listen to a telephone replay at 866-400-9641 or 203-369-0546.

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 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 and described in detail in our SEC filings.

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

Now I will turn the call over to Andy Reinland.

Thank you, John.

Fiscal Q2 of 2014 was a quarter of solid execution as customers continued to embrace our solutions, increased adoption of our new tiered pricing model, Good, Better, Best, and continued momentum with our security and service provider business.

Revenue of $420 million was above our guided range of $408 million to $418 million, an increase of 3% from the prior quarter and 20% year over year.

GAAP EPS of $0.91 per share was above our $0.87 to $0.90 guidance.

Non-GAAP EPS of $1.27 per share also exceeded our guided range of $1.23 to $1.26 per share.

Product revenue of $225.1 million grew 3% sequentially and 22% year over year, representing 54% of total revenue.

Service revenue of $194.9 million increased 4% sequentially, 18% year over year, and accounted for 46% of total revenue.

Revenue from the Americas accounted for 56% of total revenue during the quarter.

EMEA contributed 24%; APAC, 14%; and Japan, 6%.

On a year-over-year basis Americas revenue grew 25%; EMEA revenue grew 23%; Japan revenue, 17%.

APAC revenue was essentially flat.

Enterprise customers represented 65% of total sales during the quarter.

Service providers accounted for 23%, and government sales were 13%, including 5% of total sales from US federal.

In Q2 we had three greater-than-10% distributors: Ingram Micro, which represented 16.9% of total revenue; Avnet, which accounted for 14.4%; and Westcon, which accounted for 12.3%.

Our GAAP gross margin in Q2 was 82%.

Our non-GAAP gross margin was 83.4%.

GAAP operating expenses were $233.5 million, slightly above our guided range of $226 million to $233 million, a result of strong hiring as we continue to invest in our expanding market opportunities.

Non-GAAP operating expenses were $201.5 million.

GAAP operating margin was 26.4%.

Our non-GAAP operating margin was 35.4%.

Our GAAP effective tax rate for Q2 was 37.2%.

Our non-GAAP effective tax rate was 34.8%.

Turning to the balance sheet, cash flow from operations was $82 million, reflecting the large federal tax payments normal in our fiscal second quarter.

After repurchasing 1.4 million shares of our common stock for a total of $150 million, we ended the quarter with approximately $1.16 billion in cash and investments.

Approximately $631 million remains authorized under the share repurchase program.

DSO at the end of Q2 was 48 days.

Inventories were $20.7 million.

Capital expenditures for the quarter were $5.1 million.

Deferred revenue increased 20% year over year to $587.7 million.

We ended the quarter with 3,635 employees, an increase of 115 from the prior quarter.

During his prepared comments, John will provide an update on the various business drivers that contributed to our growth in the first half of fiscal 2014.

As we enter the back half of the year, we believe these drivers will contribute to continued revenue growth and improving profitability.

For the third quarter of fiscal 2014 our revenue target is $428 million to $438 million.

GAAP gross margin is anticipated to be in the 82% range, including approximately $4 million of stock-based compensation expense and $2 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 $228 million to $236 million.

This includes approximately $27.5 million of stock-based compensation expense and $0.3 million in amortization of purchased intangible assets.

For Q3 we are forecasting a GAAP effective tax rate of 38.5% and a non-GAAP effective tax rate of 35.5%.

Our GAAP EPS target is $0.99 to $1.02 per share.

Our non-GAAP EPS target is $1.33 to $1.36 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 $23 million.

And we believe our cash flow from operations will be at or around $130 million.

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

Thanks, Andy, and good afternoon, everyone.

I was very pleased with our performance in Q2.

We experienced good year-over-year growth across most of our major focused business areas, and the most pleasing metric in the quarter was the 22% year-over-year growth in product revenues.

From a sales perspective, the Americas, EMEA, and Japan all recorded double-digit year-over-year sales bookings growth.

However, sales in Asia-Pacific region were flat over last year, due mainly to a drop in sales in China.

Our services business delivered another solid quarter, with 18% year-over-year revenue growth, and added a healthy increase to our deferred revenue balance, which now stands at $588 million.

If you recall, we introduced our new pricing and software tiering strategy, Good, Better, Best, in the middle of last quarter.

And we were very happy with the customer adoption, especially in the Best category.

Q2 was our first dual quarter with the GBB go-to-market model.

GBB sales were up 82% quarter on quarter in Q2, with over 70% buying Best.

This is significantly above our original modeling assumptions, and this trend, combined with good sales execution with software module sales, resulted in our software revenue reaching a record high in the quarter, with software sales at the highest percentage of overall revenues ever.

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

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

We had two multimillion-dollar sales wins in the quarter where the F5 solution replaced existing competitors' solutions.

In the financial market, we replaced the incumbent with a very large APM access sales win.

And in the service provider vertical a Tier 1 service provider purchased our AFM firewalls to replace their existing traditional data center firewalls.

We now have two world-class security operations centers live and operational in Seattle and Tel Aviv to support our new online security service from our Versafe acquisition.

We are starting to see sales wins of the Versafe services, which include state-of-the-art technology for Internet anti-fraud, anti-phishing, and anti-malware solutions.

And we have a number of large proof-of-concepts underway for these subscription-based services.

We also announced our secure Web Gateway solution last quarter.

And we are starting to build a pipeline of opportunity for this subscription-based service.

In February F5 and VMware introduced a high-performance secure access solution for Virtual Desktop and Desktop-as-a-Service.

Together, F5 and VMware's technologies enable organizations to provide a secure experience to the mobile workforce, with the ability to readily and securely access applications wherever they may be, all while realizing low-cost and easy deployment.

F5 introduced virtual additions of BIG-IP Access Policy Manager tailor-made for VMware Horizon View environments, a companion reference architecture, and an iApp to optimize deployments.

The virtual solutions provide secure access control for Horizon View and are designed for customers of any scale -- whether they are starting small or going big with their Virtual Desktops.

We had a very solid performance in the service provider business last quarter.

I mentioned the large win that we had with our AFM Firewall solution.

In last quarter's conference call, we stated the new release of TMOS version 11.5 and our most recent version of our peripheral orchestration engine, BIG-IQ, including significant new functionality for our centralized management solution, BIG-IQ Security, for large-scale AFM Firewall deployments.

I believe these enhancements and new functionality, combined with our significant price-performance advantages, were key factors in the selection of the F5 solution.

Traffix SDC sales continued to be strong in the quarter, with several new and repeat carrier wins as LTE networks expand and add functionality such as LTE roaming.

Revenue from Traffix sales were up sequentially from last quarter, and we continue to experience an improving win rate in competitive engagements.

We launched our service provider Synthesis architecture at Mobile World Congress in February and received very positive reactions from the industry , and especially from the service provider customer base.

This included solutions for data traffic management, signaling traffic management, virtualization, NFE, and security.

In particular, the two new AFM architectures for Gi network consolidation and LTE roaming were very well received.

As far as a product roadmap is concerned, we will continue to introduce significant enhancements and world-leading technology in our key areas of focus: security, service providers and mobility, the cloud, orchestration, and software-defined application services.

These application services are available to our customers as systems, as software-only solutions, as a combination of both on-premise and/or in the cloud.

With our new Synthesis architecture, customers can improve service velocity and accelerate time to market through automated provisioning and intelligent orchestration of these 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.

You may have seen an announcement of our new VIPRION 2200 offering last week.

This is another example of F5's commitment to best-of-breed performance, quality, and innovation, flexibility and future-proofing for the customer's data center.

The VIPRION 2200 is the industry's first application delivery controller in a 2U appliance footprint, providing unmatched performance while preserving the customer's investment in VIPRION technology.

We believe that the VIPRION 2200 has no real competition in its class and will prove to be well received by our customers.

The VIPRION 2200 uses our innovative ScaleN technology to provide resource elasticity and high-density multi-tenancy, expanding the capacity of our physical and virtual solutions to seamlessly scale and consolidate application services on demand.

As far as the outlook is concerned, Andy indicated that we expected a lot of both sequential and year-over-year growth this quarter.

The drivers of our business remain robust, and we enter Q3 with a very strong pipeline of future business.

Our portfolio of application services continues to expand aggressively, which in turn expands our addressable market.

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.

I am pleased with our results in the first half of the fiscal year, and I feel very optimistic about business prospects for the remainder of the year.

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

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

Jeff Kvaal, Northland.

I was wondering two things.

Number one, you commented a little bit in the press release about the very few surprises in the second quarter.

I was wondering if that were the same set of assumptions that you were using towards -- well, first, if you could comment on that; and then, secondly, if that was the same set of assumptions that you were using in the second quarter?

And then my second question may be for Andy, and that is on the gross margins: if software is as high as it's ever been as a percentage of the mix, should we not have expected a little bit more on the gross margin side?

Or what are the variables involved in that?

Thank you.

Yes.

On the first one, very few surprises.

Linearity was as expected -- pretty solid and normal.

We didn't see any significant change in win rates.

The business drivers were as expected; in other words, security -- we were very happy with that.

We were happy with Traffix.

We were happy with the possibility in the enterprise replacing Cisco ACE areas.

So generally, it was as expected, hence the no surprise comment.

Yes.

And then to the gross margin, one of the dynamics we have right now is the rollout of our new product line.

And whenever you do that, a number of variables come into play around your margin -- warranty, many indirect costs.

So we are just seeing that dynamic, which is muting the benefits there.

But overall what we are happy with is that we are managing the gross margin consistently with the last couple quarters.

Okay.

So, John, then does that mean that you apply the same set of assumptions to the June quarter when setting that guidance?

Is that the way to think of that?

Pretty much.

I think that's reasonably accurate.

Obviously, one of the things we are excited about is we are going to see things like Versafe, the anti-fraud capability start to come into play.

You're going to see -- we are going to start to introduce a storefront with the LineRate area.

So there's other incremental things, but generally I think that's a valid assumption.

Okay.

I'll pass it on.

Thank you, gentlemen.

Rod Hall, JPMorgan.

Hi, this is Greg Schuck for Rod Hall.

With regards to security, can you guys possibly split out enterprise versus telecom?

And then, also, to what extent do you guys see yourself in data center implementations at this point?

Thanks.

Regarding security, we don't really split out enterprise with telco.

I mentioned a couple of times in my introduction that we had a pretty large security deal with our firewall AFM solution in telco, but we don't really split it out.

What I have said in the past, and I think it's still the situation, is that when you look at service provider, in particular, security is definitely a very, very big opportunity.

But it is in the enterprise, as well, so -- but we don't split it out by numbers.

Okay.

And I guess my follow-up would be -- with June guidance, is it possible to put some color around the new Good, Better, Best framework, and as to what percent of customers would be kind of on the new pricing versus old?

Do you guys have a general sense of that, or is it --?

No, I think more we are focused on the trend, which -- this was really the first full quarter.

And it exceeded our expectations, so we are very happy with that.

And I think we will see that continue.

But as for breaking it out specifically, we are not going to do that.

I mean, with Good, Better, Best, apart from the obvious benefits of, you know, been easier to package the solutions together for the customer; giving them some incentive to add more modules; what it really gives us is a really easy entry point for the salespeople to start to talk to our customers about that added value.

We could easily introduce Good, Better, Best, and then they decide to buy just a vanilla system with maybe one module, but they are thinking about the other modules because we have had the opportunity to talk to them.

Thanks, guys.

Jason Ader, William Blair.

Thanks.

A couple of quick ones here.

The operating margin was a little lower than I had expected, Andy.

And it sounds like you had a good hiring quarter.

But you talked about some improvements in the back half.

What's the right sort of near-term target for operating margins, let's say over the next 6 to 12 months?

That's the first question.

And then I'm just a little confused on the GBB comment, John.

So when you said GBB sales were up 82% sequentially, what does that mean?

What percentage of your customers are actually buying in this way?

And how can we even think about that?

Yes.

Let me answer it first of all.

So we had about half the quarter when the introduced it in the previous quarter, in Q1.

Q2 is our first [dual] quarter, and the amount of revenue that we saw with GBB sales was up 82% from that half-quarter sale.

That's fundamentally what it is.

We are not going to split out the actual numbers in terms of the revenue, but we are very happy with the results.

And we are especially happy with the split -- the percentage that went towards the Best of the --- you know of GBB.

In addition to that, the operating margin.

The way we are looking at it now, we think we are in a great spot.

We have good revenue growth going.

We are generating strong cash, increasing EPS; and at the same time, we see some opportunities that we want to invest in.

So I stand behind my comments.

We are going to see profitability ramping in the back half, but we are going to be looking at opportunities to invest that we think will drive the top line.

That's how we are going to approach it.

So you are not going to give any specific number for the next, whatever, sort of near-term operating model kind of number, like you gave in the past?

Well, you know, we generally in specific hard numbers really are a quarter out.

So you can look at our guidance and kind of lay it out, and with the ranges that we gave see where we are going to land.

And then when we get beyond that, it's usually directionally -- usually not beyond the fiscal year.

So I'm kind of sticking to those comments.

So we are going to see a ramp through the back half of the year.

And then come October, we will address in a general direction for next year at that time.

Thanks.

Ehud Gelblum, Citi Research.

Hi.

Thanks, everyone.

It's Stan Kovler in for Ehud.

I just wanted to cover some of the demand areas.

Do you feel like demand is really coming from replacements and current customers with higher mix?

You mentioned the GBB; 70% of those are coming in at the higher end.

Or is it just the overall demand in the market is increasing?

If you could specifically touch on the area of cloud, and how some of those customers are doing, and what they are deploying in the context of your competitors, as well.

There are some competitors in that space for either virtual or some of the platform products that they have.

And then a final question for Andy, just a housekeeping on OpEx.

It came in a little higher; just following up on the last question there.

Do you expect to hire at the same pace for the rest of the year?

Thanks a lot.

This is John.

And I'll talk about it, and I think Manny can talk about some of the cloud things; and then Andy will give you the answer to his question.

You know, it's interesting; when you say demand, one of the things that I am very excited about at the moment is that over a fairly short space of time, we really have expanded our addressable market.

The acquisition of Traffix is a good example of that.

We feel very good about what we are seeing with the Versafe subscription service.

We think we have an opportunity there.

We are going to be getting more active with the LineRate solution for web developers.

Security -- the demand there that we see for our module sales, and all three of them.

And clearly, the traditional firewall is a greenfield opportunity for us, and we are starting to see some real good success there.

So from that perspective -- and then, you know, I think Good, Better, Best -- the product refresh and the ACE opportunity are all big opportunity.

That's why we've been hiring.

We're hiring because we are seeing demand overall as an opportunity.

And Andy will give you more details on your specific question, but I think you will see us doing that in the future, because it would be crazy not to do that.

And then as part of that, if you look at the technology changes that are happening with the cloud that Manny can comment in a second; the pricing structures; the buying capabilities of the customer, we think we are in really good shape when we look at our current portfolio of products, with software, and BIG-IQ, and areas like that.

So we think we are in a real sweet spot of a lot of these very significant changes.

Yes, and Stan, just to add some comments, this is Manny, on the cloud side.

So on the cloud side, what we are seeing is a massive adoption from our customer base around hybrid clouds, both on-prem, off-prem type solutions.

And there is a couple of metrics I will share with you, or data points I will share just to give you an indication of the success we are having on that.

One is that our Virtual Editions, which is our software version supported across a magnitude of hypervisors, has seen both significant quarter-on-quarter and year-on-year growth.

We continue to see that every single quarter, and we are very happy with that.

In addition to that, just this quarter we also launched a $95 Virtual Lab Edition, so customers can try that edition in the market segment.

And that, again, has had an incredible ramp-up rate, because people are trying smaller workloads out in the cloud and making sure those solutions work.

So we saw great, great momentum with that.

And then, third, we are launching some new licensing programs also for the cloud.

They make it a little simpler for users to buy cloud-based services and for cloud providers to package solutions to the market segment.

And we are seeing that take off in the market segment, as well as the number of cloud partners.

Our philosophy is pretty simply to make sure that our solutions are available in the cloud in addition to be enterprise, and enable customers to have this hybrid solution set.

And, Stan, and then as far as hiring goes, I said that we are going to add above 100 for the current quarter.

And I think we will continue that pace through the rest of the fiscal year.

Thanks.

That's very helpful.

If I could just follow up on one more question: if I add up all the indirect sales that you mentioned in the top three indirect sales channels, it looked like sequentially from those three folks the revenue declined slightly.

And, obviously, overall revenue grew.

Can you just help us understand what's going on with direct versus indirect there?

You know, the numbers that we give there are distributors, right, but then go through resellers.

So it's a little bit to look at it is just dependent on how sales break down and who the customers want to work through and resellers want to work through.

We are required to disclose it.

But there's nothing I'd read into that from one quarter to the next.

Thanks a lot.

Pierre Ferragu, Bernstein.

I have, actually, one very specific question on China.

You mentioned sales there were clearly below the trend of other regions in the world.

If you could give us some color on how things are developing there, that would be very useful.

And then, more broadly, about a year ago you had, like, a slowdown in sales, and that was mostly for (inaudible) driven by the service provider segment, where orders can be lumpy.

And so I was wondering in your performance today and your revenues in this quarter, could you give us some sense of whether your numbers are being supported by actually very large orders from either very large cloud-type customers, or very large operators?

And if there is a bit of a risk of lumpiness in your revenues because of that in, I don't know, maybe in the next 12 months or something like that.

Thank you.

Okay.

Regarding China, I think I've said -- certainly I said it on the last call; I may have said it on the call before -- it is a tough environment.

We've seen that when we have looked at some of our peers' results as well.

I think that's going to continue for a while.

We have probably bottomed out in terms of the opportunity there.

I don't think there's much risk of it being worse.

However, it's not an area that we are putting any big expectations in when we give guidance.

And as I say, I think that's pretty much across the technology board right now.

Regarding our lumpiness, unfortunately, there's always the opportunity for lumpiness in the service provider business.

I think our portfolio has increased dramatically.

That will in some way mitigate against that lumpiness.

I'm not saying we have totally mitigated; we have not.

But certainly, with the security operation, we've got opportunity we have there; with Traffix opportunities, with the LTE rollout, with the mobile traffic steering -- to some degree, we have a bigger portfolio there.

But there's always that opportunity.

In terms of the specifics, I think you were asking, where there any really massive orders?

Not really.

I mean, we had good orders -- million-dollar-plus-type orders.

But nothing way out of the ordinary.

Overall, the number of million-dollar orders was actually quite solid, but that includes enterprise as well as service provider.

Thanks very much.

Catharine Trebnick, Dougherty & Company.

One of the questions I had is -- so you had a few wins for security in the service provider area.

Could you give us some more color on -- was it more data center?

Have you sold into any of the mobile Internet aspects of it?

And then the follow-on question is -- well, take that one first.

Thank you.

Catharine, it's Manny.

Real quick, just on the service provider, I will give you one Tier I operator.

It was a data center solution set.

Basically, it was a pretty significant data center solution set, protecting their applications for both DDoS mitigation all the way up to Layer 7 firewall security, application security, as well as traffic steering functionality for their data center.

That was one of many footprints that service provider has.

And that was a significant deal.

That was predominantly midrange product in our portfolio, but significant in the sense that it was lots of units that are going out there.

So we feel pretty fortunate with that.

That's a data center solution.

In addition to that, that same service provider has a Gi solution that we are right now in proof-of-concept with.

So we are pretty excited about that opportunity, which we think is equal, if not much larger, than the current opportunity ahead.

And that applies to stuff across the world.

I'm just giving you one example.

No, no.

I understand that totally.

And then the other question is on Traffix.

You did say that that was up quarter over quarter.

Are the deals more for LTE roaming, or are they any specific area that you are getting more traction with than others?

And are you replacing Tekelec in some of these deals?

Yes.

This is Manny, again.

So, yes, it is LTE roaming.

We are seeing a lot of that.

We are seeing some basic just DRA load-balancing functionality for the signals that are out there.

And then we have done in certain situations replaced Tekelec out there.

Again, we are seeing a lot of good momentum in that environment.

And we are talking to a lot of the service providers that are out there.

There's no question Tekelec had early entry into the market.

They've been in the market longer than we were.

But we feel pretty comfortable that from a technology perspective, our solution is comparable to anything in the market, and really superior to all that's out there.

All right.

Thank you very much.

Sanjiv Wadhwani, Stifel Nicolaus.

Two questions.

Just, John, on the enterprise vertical did really well this quarter.

I was wondering if there was any granularity you could give on certain areas that might have exceeded expectations, like financial services, etc.

And then for Andy: on the Good, Better, Best pricing, I know you have talked a little bit about the gross margin puts and takes around -- with your software, sort of percentage going higher.

But over time, as you see more and more deals queuing towards the best categories, should we be seeing a positive impact on gross margins over the next 12, 18 months?

Yes.

On the enterprise vertical of the enterprise business, yes, it was very solid.

The finance vertical, by the way, is always a good one for us.

It is like security.

It is -- like, new architectures, including hybrid clouds and areas like that.

We are really in a great spot for that.

So I expect that to continue.

But it was pretty solid.

And I did say last quarter that from a sales perspective, it was also solid last quarter, as well.

And then to the Good, Better, Best, I'd answered that, yes, in theory, adding more modules that are purely software to increase sorter size should help the margin.

But we are careful not to guide that for a lot of reasons.

A lot of it is strategic, that we want to keep that close in case we want to use that with our channel partners or in other ways.

But in theory, your question is right.

It gives us flexibility.

Got it.

Helpful.

Thanks.

Matt Robison, Wunderlich Securities.

On the Versafe, do you envision that activity ever becoming material to CapEx?

To CapEx?

In terms of spend in support?

Yes, spend to support.

Yes.

I think it could add somewhat, but as we model it out and look at growth, we think it will be in line.

Nothing that we think would accelerate CapEx abnormally.

We didn't have a Seattle security operations center up until we introduced it just recently.

And I mentioned that in the call.

And that didn't have a massive effect on the CapEx.

So do you think that your model in terms of -- as it matures and starts to hit its business plan, you won't see an increase in CapEx to revenue from it?

I think we could, a little bit.

But I don't think anything that would draw attention.

I think we would manage it in the broader business.

We are much more excited in terms of the fact it's subscription-based service, and as we add more wins, that revenue number goes up.

I think that's the goal.

Obviously, there will be some investments of doing that.

But I think the prominent thing is the revenue and the contribution to earnings.

Yes.

I get that.

And we are kind of seeing a bit of a trend amongst companies that come with technology that they are renting it a bit more, whereas they used to just sell it and that's (inaudible) cloud.

. Thanks.

Brian, this is John Eldridge.

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

Paul Silverstein, Cowen and Company.

Guys, I want to revisit a couple of questions and just some clarification.

First off, John, I heard your comment about the million-dollar deals, in general.

Can you give us the average deal size?

Was there any change?

Actually, the average order size, which is the metric we give, it had been pretty steady at right at $100,000.

But we saw that increase last quarter to $110,000.

So about a 10% increase.

Andy, was there also an increase in the large deals?

I think historically you have shared with us million-dollar-plus deals.

There was, Paul.

It's John.

And that's why I commented during the last time that we did see a nice increase on the total revenue that we got from million-dollar deals plus.

So there was general increase.

And then going back --- in going back to your comment earlier about the increase in software content will help, but you may choose to be strategic in terms of passing on benefits, potentially.

I thought I heard you say that new product introductions had a somewhat of a muting impact on the benefit you otherwise would have seen from software.

Was there anything extraordinary about this new product introduction?

Or was this -- all things being equal, if you don't pass on the benefits going forward, we would see the benefits show up in gross margin?

I mean, really focusing just on that new product introduction piece.

Anything extraordinary about this go-around?

No.

There's really nothing extraordinary.

We generally see when we come out with new products, just as we are working through managing the supply chain, as we are managing warranty reserve, manufacturing costs, we see those increased costs.

I think to some extent you are kind of [munging] two questions together.

Where the Good, Better, Best pricing, which adds software modules over a longer period of time, in theory could improve the gross margin.

The short-run question that was asked was is: why this specific quarter?

John made the comment that our software attach rates were at an all-time level; why we didn't see that in the gross margin.

And I was saying that was offset in the short run by the fact that we are in this stage of new product introduction.

Understood.

And then China as a percent of your Asia-Pac revenue -- what is the issue, John?

Obviously, we have all seen the reports about economic activity in China is subsiding.

There's the US issue in terms of the technology concerns.

Can you identify -- are you able to identify what the particular issue is?

If it's general, with respect to perception of risk, or something else?

Is China roughly consistent with being 50% of Asia-Pac economy?

Would that be about right for your impact on you?

No.

No, it's lower than that.

And it's a tough one, because as I say, it's not that we are not doing -- we are doing business there, but we have definitely over the last, probably, 12 months -- 9 months, 12 months, we have definitely seen that as just a tough environment in terms of getting orders from customers, etc.

Whether that's edict or not, who knows?

I guess it is what it is.

One last one.

US Fed, any insight you could share with us, what you are seeing there?

I'm sorry?

US federal.

Yes.

We are pretty comfortable with US federal.

We really like the team that we've got in place.

By definition we tend to expect a very solid quarter come September.

And I think we will see that.

If you are selling solutions based on data center consolidation, the cloud, and the Internet, then you're in good shape.

And that's what we do.

So I think that continues to be a key market for us.

Thanks, guys.

Brian Marshall, ISI Group.

Great.

Thanks, guys.

Since Paul asked three, I will just asked one.

I think -- congratulations.

This is the first quarter in roughly two years that we grew the top line 20% year over year.

So obviously moving back in the right direction.

Well done.

You know, sequentially we grew, what, almost $15 million.

Now, I'm not expecting a complete breakout, but can you talk a little bit about how your core underlying business is growing from a dollar standpoint, versus all these new opportunities that you have in security and other things, etc.?

Just kind of curious what the underlying growth looked like for the core business if you strip out all the new incremental stuff.

Thanks, and well done.

Let's get back to this whole discussion about what really is our core business.

Remember, our definition of an ADC, application delivery controller, is basically a platform, and that can be a software platform, a system platform, a combination of both.

But it's certainly a part of a bigger architecture.

That includes on that platform the ability to expand their addressable market by adding more and more bundles, solution security being a classic example.

So when we sell BIG-IP 4000, and we have our application file with ourmodule on that, we view that as an ADC market.

And that's the way we do it.

Now, obviously, there's revenue associated with each solution.

But you'll just see that continue to expand.

In other words, we believe we are expanding our addressable market there, Brian.

And we don't really look at it as: what is the basic core market?

We look at: what's the current expandable market that we'll drive into?

And that's definitely expanding aggressively.

Understood.

Thanks, John.

Okay.

Well, thank you all for joining us.

We look forward to hooking up with you again at the end of the third quarter.

And again, if you have any questions, please give me a call.

Thank you.

Thank you.

That does conclude the call for today.

You may disconnect your phone lines at this time.