F5 Inc (FFIV) 2014 Q4 法說會逐字稿

Good afternoon and welcome to the F5 Networks fourth-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 the call over to John Eldridge, Director of Investor Relations.

Sir, you may begin.

Thank you, Brian.

Welcome, all of you, to our conference call for the fourth quarter and FY14.

John McAdams, President and CEO; and Andy Reinland, Executive VP and CFO will be the speakers on today's call.

Other members of our exec team are also on hand 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.

In addition, you can access an archived version of today's live webcast from the events calendar page of our website through January 21.

From 4:30 PM today until 5:00 PM Pacific time October 30, you can also listen to a telephone replay at 866-491-2915 or 203-369-1722.

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.

Before we begin, I want to remind you that we are holding our 2014 Analyst Investor meeting at the Sofitel Hotel in New York on Thursday November 13.

If you plan to attend the meeting, you can register online from the link on our IR events calendar entry for November 13.

Now I will turn the call over to Andy Reinland.

Thank you, John.

In my prepared remarks today I will first discuss our results for the fourth quarter and the fiscal year ended September 30.

Then I will provide guidance for the current quarter and finally outline our general planning assumptions and expectations for FY15.

For the fourth quarter of FY14, we saw continued momentum with our key drivers with solid results for both revenue and earnings.

Revenue of $465.3 million was above our guided range of $453 million to $463 million, up 6% from the prior quarter and 18% from the fourth quarter a year ago.

GAAP EPS was $1.26 per share, above our guided range of $1.15 to $1.18 per share.

Non-GAAP EPS of $1.57 also exceeded our guidance of $1.46 to $1.49 per share.

Q4 product revenue of $255.5 million, up 8% from Q3 and 20% from the fourth quarter of last year, represented 55% of revenue.

Service revenue of $209.8 million increased 3% sequentially, 15% year-over-year and accounted for 45% of revenue.

On a regional basis, the Americas grew 16% year-over-year and represented 59% of revenue.

EMEA grew 22% year-over-year, and accounted for 22% of overall revenue.

APAC, which accounted for 14% of revenue, increased 25% year-over-year and Japan, at 5% of revenue, grew 4% from a year ago.

Enterprise customers represented 67% of Q4 total sales.

Service providers accounted for 19% and government sales were 13%, including 7% from US Federal.

During the quarter we had three greater than 10% distributors: Westcon, which accounted for 16.9% of total revenue; Ingram Micro, which accounted for 16.3%; and Avnet at 14%.

Continuing down the income statement, GAAP gross margin in Q4 was 82.4%.

Non-GAAP gross margin was 83.5%.

GAAP operating expenses of $235.8 million were within our $232 million to $240 million guided range.

Non-GAAP operating expenses were $212.8 million.

Our GAAP operating margin in Q4 was 31.7% and non-GAAP operating margin was 37.8%.

Our GAAP effective tax rate for the quarter was 37.2% and our non-GAAP effective tax rate was 34.5%, in line with our forecast.

Turning to the balance sheet, in Q4 we generated $170 million in cash flow from operations, which contributed to cash and investments totaling $1.13 billion at year-end.

For all of FY14, cash flow from operations totaled $549 million.

DSO was 47 days.

Inventory at the end of the quarter was $24.5 million.

Deferred revenue increased 20% year-over-year, to $636.7 million.

In Q4, we repurchased approximately 1.32 million shares of our common stock at an average price of $113.21 per share for a total of $150 million.

Approximately $331 million remains authorized under the current share repurchase program.

During the quarter we added 90 employees, ending in the year with approximately 3,835 full-time employees.

For the fiscal year we added 480 employees, an increase of 14%.

For the full year, with a strong close to our fiscal year, F5 exited 2014 with record top-line and bottom-line results, reflecting solid year-over-year revenue and earnings growth.

Revenue for all FY14 was $1.73 billion, up 16.9% from FY13.

Product revenue of $936.1 million was up 17.2% from the prior year and accounted for 54% of total revenue.

Service revenue of $795.9 million grew 16.6% during the year and represented 46% of the total.

GAAP net income for FY14 was $311.2 million or $4.09 per share.

Non-GAAP net income was $413 million or $5.43 per share.

Moving on to our guidance for Q1 and our FY15 outlook.

Entering FY15, we are encouraged by the strength of our enterprise business, growing demand for our security products, the success of our Good, Better, Best bundles in driving larger deals and broader adoption of our solutions.

We continue to drive our leadership position in cloud with strong and maturing partnerships with industry leaders such as Cisco, HP, Microsoft and VMware, and accelerating growth of our Virtual Edition product set.

In addition, we continue to win large deals and service providers with both our traditional traffic-steering solutions and telco-specific offerings such as Policy Enforcement Manager, CGNAT and Traffix diameter products.

We also plan to formally roll out Versafe and Defense.

Net as subscription services to our sales force during the current quarter.

We believe these new security offerings will meaningfully expand our addressable market opportunities.

On the strength of these ongoing drivers and incremental solutions, we anticipate another year of solid growth and profitability in FY15.

In preparing our Q1 guidance, we have factored in typical seasonality that we see with the start of a new fiscal year, and common with peers in the tech industry.

With this in mind, for the first quarter of FY15, we are targeting revenue in a range of $460 million to $470 million.

We expect GAAP gross margins in the 82% range, including approximately $3 million of stock-based compensation expense and $2.7 million in amortization of purchased intangible assets.

Non-GAAP gross margins are anticipated at or around 83.5%.

We estimate GAAP operating expense of $245 million to $253 million, including approximately $28 million of stock-based compensation expense and $0.5 million in amortization of purchased intangible assets.

We anticipate a GAAP effective tax rate of 38.5% for the quarter and a non-GAAP effective tax rate of 35.5%.

Our Q1 GAAP earnings target is $1.10 to $1.13 per share.

Our non-GAAP earnings target is $1.46 to $1.49 per share.

We believe we will generate cash flow from operations in excess of $180 million.

We plan to increase our headcount by approximately 100 to 125 employees during the quarter.

Looking out to the year ahead, our general planning assumptions and expectations for the year are as follows: We believe with our expanding product portfolio, growing customer awareness and adoption of Synthesis Architecture, our partnerships with key players in the emerging SDN market, and assuming no material impact to the industry for broader macro issues, we will drive year-over-year product revenue growth throughout FY15.

We also expect to see, from the base of Q1, sequential growth in our business with the traditional a strong half of the fiscal year.

We anticipate that non-GAAP gross margins will remain in the 83% to 84% range.

With our expectations of revenue for FY15, we anticipate continued investment in our business to drive top-line growth.

As such, we expect non-GAAP operating margins to trend in a similar fashion to FY14, in the mid 30%s range for the first half of the year and increasing through the second half.

Capital expenditures are expected to range from $6 million to $12 million per quarter for ongoing infrastructure investments.

We also anticipate additional CapEx of $15 million to $20 million in the second half of the year, with expansions of our facilities in both San Jose and Tel Aviv expected to come online in the summer of 2015.

We expect stock compensation to increase in Q2 $5 million to $7 million and then remain roughly at Q2 levels through the rest of the year.

And finally, assuming the R&D tax credit is not extended during FY15, we expect our effective tax rates to average approximately 38.5% on a GAAP basis and 35.5% on a non-GAAP basis for the year.

As John mentioned, our Analyst Investor meeting will be November 13.

We hope you can join us as our executive team presents the Company strategy and go-to-market plans for F5.

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

Thanks, Andy, and good afternoon, everyone.

I'm sure that you all have seen the announcement regarding my decision to retire at the end of FY15 that was sent out today.

I just wanted to say a few words about my decision and then we will move on to the business in hand.

It was a really difficult decision.

I'll be 64 years old in February and when I retire at the end of the fiscal year I will be approaching the 65-year milestone.

Just to be clear, this was a personal decision that my wife and I agreed to, and frankly was made harder by my profound affection for F5, our business and the F5 team.

You will hear me repeat this in my quarterly remarks, but I feel really excited about the prospects open to F5 in the future, and my decision was in no way related to any negative business considerations.

F5 has an awesome array of bench strength in the executive team and throughout the entire organization.

My focus for 2013 is simple.

Number one, deliver world-class business results every quarter; and number two, work closely with our Board to have a smooth and effective transition plan for my successor.

Okay let's move on to talk about our business.

I'll take a few minutes to discuss F5's performance in FY14, talk in more detail about our Q4 results and then comment on our outlook and the exciting opportunities we see going into FY15.

I was very pleased with our overall performance in FY14.

The F5 team delivered overall revenue growth of 17%.

This growth was split equally between services and product growth, both at 17%.

We also delivered world-class operating margins each quarter, including a non-GAAP operating margin of 37.8% in the final quarter of the year.

We exited FY14 with a stellar balance sheet with over $1.1 billion in cash and investments, having purchased $651 million of our common stock during the year.

We increased our headcount by 480, ending the year with 3,835 employees.

There were many highlights of FY14.

Our security solutions are driving a significant number of sales wins including many multi-million dollar transactions.

Approximately 36% of our total product sales last year included one or more security products and this represents 41% growth over FY13.

We added significant functionality to our web application firewall and access solutions, ASM and APM, and we expect to see continuing demand for these products as the complexity and sophistication of application attacks continue.

There is clearly an urgent and growing requirement for customers to protect their applications and on-premise data centers and in private and public clouds.

FY14 was the first full year of sales of our traditional firewall solution, AFM.

AFM sales have grown significantly in the year and we have won several large transactions where we replaced the incumbent competitive solutions.

Project wins have included both data center firewall solutions and Gi Firewall solutions with tier one service providers.

Our Gi firewall is situated between a service provider's mobile network, radio network and the internet and is ideal for protecting subscribers from complex attacks such as large DDoS threats.

We also significantly expanded our portfolio of subscription security solutions this past year.

We added our secure Web Gateway product, our Versafe, anti-malware and anti-phishing subscription service via our security operations centers and we completed the acquisition of Defense.

Net, adding a high-capacity cloud-based service for protecting data centers from DDoS attacks.

These cloud-based protection capabilities are complementary to our on-premise DDoS solution that I referred to earlier.

This combination provides our customers with the most comprehensive hybrid DDoS solution in the market, engineered to absorb the full threat spectrum of DDoS attacks.

Although we have seen customer orders already for both the new cloud-based DDoS service and the anti-malware and phishing solutions, we have yet to formally release these solutions to our global sales force and partner channel.

We plan to introduce these additional solutions next week at our international sales conference, along with training programs and sales collateral.

The team also delivered a strong performance in the service provider market last year.

I already mentioned the opportunity we have with our security products in the service provider market, especially with our Gi Firewall solution.

We also saw increased traction with our Policy Enforcement Module, PEM, which provides integrated subscriber and application awareness, traffic steering, reporting and policy enforcement.

Another area where we have seen good success in the year with service providers comes from a unique capability with TCP protocol optimization.

We introduced seven specific optimizations last year in the TMOS Vancouver and Alpine releases.

These optimizations improve TCP performance when the network is experiencing packet loss and/or network congestion typically caused by the explosion of mobile data traffic.

This allows for significant cost savings by the mobile service provider, as well as providing a faster service to subscribers.

Although the functionality is targeted at LTE and 4G applications, it also helps improve general data center performance, especially within virtualized data centers where virtualized applications can burst traffic at rates exceeding 10 gigabits per second.

We have also made significant progress with our Traffix diameter solutions for LTE rollouts.

Our competitive win rate is very high and we now have approximately 40 projects currently in production with several other projects in process.

In addition, I would like to point out that we now have tier one service provider production wins in all theaters.

These projects can be complex and very mission-critical, and we expect our focus in the next few months to be concentrated on project delivery and project rollout.

We've made great progress with the product refresh opportunity throughout the year.

The feedback from both existing customers and new prospects has been excellent, and I believe this opportunity will continue throughout FY15.

Our install base currently includes over 75,000 systems that have been installed three years or more.

Approximately 40% of the install base, which is clearly a good refresh opportunity.

Another highlight last year was our progress on increasing traction with software sales, including software modules running on TMOS and software-only Virtual Edition solutions.

Both our software attach rate and our Virtual Edition sales have increased steadily throughout the year.

Customer reaction to the Good, Better, Best sales strategy has been fantastic, and I will give some specific details on Q4 GBB sales when I talk about our Q4 performance.

Our software-only Virtual Editions solutions continues to gain traction with annual revenue growth up more than 49% from FY13.

FY14 was another great year for extending our technology leadership.

I already mentioned the new cloud-based DDoS service, the new anti-malware and phishing solutions and the secure Web Gateway product.

We also introduced DDI integration with our APM access solution for VMware Horizon.

We released BIG-IQ our new automation and management platform with three modules for cloud busting, security and device management.

And we delivered significant cloud and SDN integration with VMware, Cisco, Microsoft, Hewlett-Packard, Alcatel-Lucent and OpenStack.

In addition, we introduced over 300 major new features across two major releases of TMOS.

We achieved significant enhancements with our VE performance with 10 gigabits per second available for most hypervisors.

We introduced the next generation iControl on BIG-IP using REST to support software-defined data center and cloud-based architectures.

We also added a first-ever 2-slot chassis as an entry-level Viprion product.

I believe our competitive position and technology leadership is as strong as it's ever been.

A good example of our competitive strength is demonstrated by our success in the Cisco ACE replacement opportunity, with another solid year of revenue from new customer ACE replacements and solid growth from existing replacements for additional sales in areas like security.

We believe that our total replacements to-date account for significantly less than 50% of the ACE install base, and we expect the opportunity to continue throughout 2015 and beyond.

Our services business delivered strong performance consistently throughout FY14 and continued to be a significant profit and revenue growth contributor while maintaining customer satisfaction at world-class levels.

The attach rate of service to product sales continued to improve and we once again experienced an excellent renewal rate.

We also continue to grow our consulting business which increases customer satisfaction and drives additional product revenues.

Perhaps the most exciting achievement in 2014 is how we have positioned ourselves to take advantage of the potentially revolutionary and disruptive trends currently facing the technology industry.

These include the accelerating adoption of public and private clouds and SDN architectures, the explosion of mobile data and the LTE rollouts, complex global security threats and software-defined everything.

I believe that the progress we have made with our Synthesis Architecture, our technology partner ecosystem and SDN partnerships, our move into orphan cloud and subscription services combined with our new pricing and business models, all combine to position us strongly for the future.

Synthesis allows our customers and partners to build future-proof architectures that support on-premise solutions with the opportunity to scale to private or public clouds as requirements dictate.

As far as Q4 is concerned, I was very happy with the performance.

From a sales perspective we saw year-over-year growth in all our major regions with especially strong results in EMEA and North America, and good improvement in Asia-Pacific and Japan.

We also saw a marked increase in larger deals, especially million dollar-plus deals during the quarter, both sequentially and year-over-year.

We continue to experience strong momentum with our Good, Better, Best sales most in Q4, with customer adoption continuing to be very strong in the Best category.

Our services business delivered another strong quarter with a solid increase in deferred revenue, which now totals $637 million.

Lastly, we are very proud to been positioned as a leader in the Magic Quadrant for Application Delivery Controllers for eight consecutive years.

As far as the outlook is concerned, Andy stated our guidance range for Q1 and the expectations we have for sequential growth throughout FY15.

We have a world-class sales force who are efficient and motivated to drive business in the final quarter of the year, and Q4 was no exception.

As usual, this leads to seasonality in Q1, which is normal in the technology market and in line with our peers.

As I have mentioned several times, we believe the business drivers we have experienced in FY14 hold firm in FY15.

In addition, some of the new business drivers that are subscription-based such as Versafe and anti-malware solutions and have cloud -based DDoS service, will pay dividends in a phased approach throughout the year and in the future.

I believe we are uniquely well-positioned to take advantage of the significant market trends which are occurring today.

And we intend to continue investing throughout the year to take advantage of these exciting opportunities.

I'd like to take this opportunity to thank the entire F5 team and our partners for their tremendous efforts last year, and I look forward to their continued support in FY15.

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

(Operator Instructions)

Ittai Kidron, Oppenheimer.

Thank you very much.

John, congratulations on your decision.

Good work this quarter, guys.

I had a couple questions.

First for you, John, with regards to the succession plan, do have any view on whether the next CEO will be from within or without the Company?

And second question for you, Andy, on the service provider side for three quarters in a row, flat to down sequentially.

Clearly you have some big opportunities and you're making some good traction there.

Can you give us a little bit more color on what's not working so well?

It seems like there's no growth in that business.

What's holding this back?

Yes, okay this is John.

Succession planning, as I mentioned, is clearly a top priority for the Board and myself, as I mentioned at the beginning of my delivery.

We are absolutely, and I want that to be very clear on this, I'm also very, very committed to delivering world-class quarters during the year as well, but clearly succession planning is a top priority.

I mentioned that we've got tremendous bench strength at F5 right now, so you can draw your own conclusions from that.

All we're going to do with the Board, is we're going to be focused on this subject.

We're going to do it properly.

It's going to be smooth.

It's going to be professional.

And I feel pretty comfortable about it.

That's really all I'm going to say on that subject right now.

Very good.

And on the service provider?

Yes, so we've talked a lot about it in the service provider space, so we see it as being a lumpy business for us.

We still feel good about the pipeline.

We feel good about what we're seeing.

Clearly we're not hitting that 20% to 25% target that we talked about.

But I wouldn't call out anything that I think -- maybe just softer spending, but nothing specific that I could call out relative to us and our experience with service provider that I'd highlight as something to worry about.

In fact, I think we're pretty excited.

I am and so is the service provider team about the TCP optimization stuff that we've done during the year.

I wouldn't underestimate that opportunity basically for heavy traffic.

It's is a great money saver and increases the quality for the service providers.

Traffix, we feel really good about.

I did mention however, that the short term, that's probably toward the end of this year.

We're very focused in making sure these big, pretty significant, complex projects we're working on with tier one people go smoothly.

That's going to be our main focus, but you'll start to see that ramp again, I'm pretty sure, as we move into the calendar 2015.

And then security.

Security is a big one.

We're starting to see traction with the Gi Firewall.

We've still got a lot of PoCs, proof of concepts, going on.

We've had orders, million dollar-plus orders on that, and that could be very big for us.

So I think there's a whole bunch of things going on there.

And PEM, I mentioned the traction in that as well.

Ittai, this is Manny.

The only thing I would add to that is a lot of the footprints that we're going into are new footprints.

That means that they take long proof of concepts.

John highlighted all of those.

They're inserting ourselves into critical components of the network beyond the traditional traffic steering.

Simultaneous with that, what we're seeing for service providers, and we are doing dozens of proof of concepts right now, the movement to Network Function Virtualization.

So we're starting to see that also.

Obviously service providers are going through a massive transformation.

Our technology is critical.

It continues to drive more toward subscriber and application awareness and movement from hardware to software, or a mix of hardware and software through NFV.

That's going to take a little bit of time, but we're really excited with the progress across the board, everything that John and Andy mentioned.

So, Manny, does that mean you do not expect an inflection point necessarily in the service provider this year?

It could take a little bit longer before all this work starts delivering?

There's no way we would say that.

(laughter) I think that would be prudent not to say that.

It is lumpy.

If we hit it off with a Gi Firewall, that could be interesting.

Very good.

Good luck, guys.

Thanks.

Pierre Ferragu, Bernstein.

Thank you for taking my question.

On the security front, you mentioned that as being like a very important driver for growth today.

I'd really like to understand how you see the opposition in the market evolving and who you actually compete with.

I know it's a question you've had very often and it's kind of a silly question, but I still don't understand whether your clients, when they look for a security solution, consider you guys as well as they would consider like a traditional security player, like Palo Alto.

Or if you guys actually sell security as an additional feature on your platform, but you don't really face traditional firewall players in competitive bids.

This is John.

I'll just take a minute and I think Manny and Karl can give you much more detail.

The key to understand us is our position in the data center and our strength there.

So most of our security solutions, we have access solutions as well, to the mobile devices.

But the key to understanding our strength is, A, we're all about the application.

We're really well-placed in the data center and we have massive performance advantages.

So with that, maybe Karl and Manny could give you more details.

I'll start, this is Karl.

John's right, our focus has been the application.

That started when we acquired Magnifire ten years ago to focus on web application firewalling.

With that, we integrated that as part of our BIG-IP portfolio, because we wanted the scalability, and we've significantly added to its capabilities along the line.

But the focus has been on the application.

Then we added things like APM for doing things like remote access, single sign-on, build the front-end applications.

The more general discussion around security is that because we sit in the data center and because we interact at the transactional level -- we're a proxy and we're able to see both sides of the transaction, both from the client and back from the server, and understand the context of application -- we can apply intelligence to that connection that other security devices can't do.

Such as like a Palo Alto, which sits at the perimeter, which is doing distinctly different types of security services, whereas we're focused, again, back at the application tier.

There's other things we do there as well.

For example now, we acquired Versafe to provide anti-fraud services.

Again, because we're involved with the transactions between the client and the server, we're able to form a trusted connection with the client dynamically and then sense certain conditions and then prevent and detect these different conditions as part of that.

So our focus on security has been effectively preventing attacks against applications.

Now we're extending our footprint in the data center, meaning providing other types of security.

You'll see more of that, we're advancing our DDoS capabilities.

We're looking at ways to provide risk assessment and other advanced analytics, as part of that.

And we'll extend from there.

This is Manny.

I'll just add a couple more things to that because I think as well covered.

The other stuff that's really important to note is that we also view the new -- there's a new perimeter in most enterprises.

The perimeter which was classically the internet boundary wall is no longer the case because we have devices that we bring into the corporate environment.

So we're doing a lot of work around identity being the new perimeter in the way users access into the network.

That's a very large growing business for us.

It's our APM business.

And the last piece I'll point out is, as an ADC we not only provide security services, we provide availability services and acceleration services, all simultaneously.

So that gives us a very strong foothold into these accounts, because we're not providing three separate devices to secure, accelerate and make an application highly available.

We simultaneously provide that based on contextualization of the user accessing the application.

That's really been our strategy and it's taking hold in the market segment.

Thank you.

That's very clear.

Thank you very much.

Catharine Trebnick, Dougherty Networks.

Hi, thanks for taking my question.

This, I guess, is for Manny and Karl.

Could you tell me roughly how many different use cases you would see in the different operators?

I think that would help with, because you're getting a lot of traction with Traffix and PEM.

But let's take a tier one operator versus a tIer two operator, and how many different use cases would they use of F5 today versus maybe perhaps a year ago?

Thank you.

Catharine, it's Manny.

It's hard to -- I don't have a year-on-year comparison, so it's hard to give you that.

I'll show you in two weeks when we're over the analyst conference, I'll show you eleven use cases that we're selling aggressively to service providers this year.

I'd have to go back and tell you how many we were doing last year.

But above and beyond that, what we're seeing with service providers is not only the standard use cases we sell around TCP optimization, firewall security, application security, the list goes on and on.

But we're also seeing service providers use the expensibility of our product, the openness of the platform, allowing them to program the platform to solve their unique application traffic steering problems and their application problems inside that environment.

That's the power of iRules, iApps, et cetera.

It's hard to put your finger on it, because we quite often get going in solving some of their application challenges when other products can't, and that's because of the capability.

In addition to that, we're seeing huge momentum with them, as I said, on NFV and VEs as we go across the board.

I'll share more of that with you in two weeks, and you can see a slide that has the actual use cases that we're going out aggressively after.

All right, thanks.

I'll circle around for other questions.

Brent Bracelin, Pacific Crest Securities.

Thanks.

John, I also wish you the best on your pending retirement here.

It's certainly been an impressive run, as you built this from a $100 million business to a Company that looks like it's well on its way to $2 billion Company.

You certainly will be missed.

Two questions for me.

One, John, in light of mixed results across the networking space, I was hoping you could talk a little bit about the pipeline visibility going into the December quarter this year versus last year Do you see anything abnormal?

Or the mixed results that you're seeing across some of your peers is something perhaps are not seeing?

Any color there would be helpful.

No, I don't anything abnormal.

As I was saying, we have a pretty good sales force.

They know what Q4 is all about and they have accelerators and they're focused and they have a sales club.

They drive Q4 business.

Normally, the emphasis on normally, you will always see the pipeline go down somewhat because they close so much business.

That's the same as it was last year.

But in terms of a like for like, we're seeing growth opportunities across the board in these drivers we talked about.

Okay, that's certainly helpful.

And then, Andy, a quick question for you around services.

I know we have the drag of slower product growth a year ago dragging overall services down.

But as we think about the slow down here to 14%, 15% growth this quarter, do you think this is the low water mark and we should stabilize here?

Or what's the visibility into the services maintenance business?

When do you think that could start to re-accelerate?

The expectation is clearly for it to flatten out this year.

We've come through the last three quarters of 20% product growth sequentially.

That's going to create that pull.

So every expectation is we'll see that start to trend more positively this fiscal.

And then from a visibility point of view, frankly it's pretty good.

Yes, with the deferred revenue that we have, well over $600 million.

Over 75% of that is current, so that gives us a good anchor when we do our analysis on the coming year.

Perfect, very helpful, thank you.

Vlad Rom, Credit Suisse.

Great, thank you, I appreciate it.

Andy, just a quick question on the guidance.

So if you look at it and you assume a little bit of deceleration on the services line, it looks like product seasonalities, perhaps more towards the low-end of historic performance in terms of the guidance.

How should we be thinking about the puts and takes embedded in the guidance?

Security sounds like it's a positive, potential rollout on the service provider side.

Can you talk about the puts and takes?

Then also, a follow-on question on the Virtual Edition, if you're seeing any potential dilution in terms of revenue with the acceleration in that product?

Thank you.

So we actually don't normally comment prospectively between products and service in our guidance.

We pretty much let it stand.

I'd go back to our comments on seasonality.

When you're looking at year over year, if you go back and look at our guidance from a year ago relative to our results and messaging, I think you'll see similar analysis.

And as John said, we're not seeing much different, distinctly different from a year ago.

I'll leave it at that.

And VE?

We're not seeing a dilution at all over the VE-type solutions.

They tend to be very different from an architecture nature.

They tend to be very horizontal in their design.

Typically, we're seeing some really big ones as well.

There was extremely big one in the federal space, for example, last quarter.

When I say big, I usually mean more than $1 million.

And there are solutions that we probably wouldn't actually be involved in, if it was pure appliance-type sales.

So we're not seen much of that at all.

Maybe over time we will, but certainly not anytime soon.

That's all.

Thank you, I appreciate it.

Erik Suppiger, JMP Securities.

First off, congratulations, John, on your decision.

Best of luck.

First off, I'm curious on the web app firewall.

Do you think that you're taking share in that market?

Can you comment a little bit on some of the competitive dynamics that you've seen in that market over the last, say, over the course of this year?

Yes, we feel very comfortable that we're taking share in that market segment.

We just actually had a NSS Labs, who ran a large test on our firewall relative to everybody else's firewall and we scored incredibly well on that.

We're also seeing huge traction from our customer base across web deployment of application firewall.

And I think what you'll see is, in the future, us also putting our application firewall out into the cloud.

As we continue to expand our cloud-based solutions, bring that out.

That will give us a full portfolio of services on-prem as well as services in the cloud.

So we feel really comfortable.

We have great technology, great performance.

And a very, very low false positive score, which is really important in the sense that we don't see a lot of noise on the network.

We actually see real vulnerabilities.

We think the work solution is going to be great for on-premise and it'll stay that way for a long, long time; all the policies it can do to protect the apps.

As a service we think it's got great potential.

Julian's organization is working aggressively on that to provide it as a service.

We will have it in this fiscal year.

I don't know if you want to say anything about that, Julian?

We're targeting April with an upside of trying to get ready for February, but April is the plan.

And with the deed of service in front of that, we announce that next week.

And we've opened all the data centers so we're ready to take orders on that as well.

This is a Jule first, because I know these are scripted.

But I think Julian did say February.

(laughter) Having said that, it's going to be during the year.

We don't want to be too specific.

Has the win rate on the web app firewall, has that changed much during the course of this fiscal year?

I'd say it's the same.

We do check the competitive run rate and it's high.

I don't know the answer to that, Erik.

Erik, this is Manny.

It's been high always, as John pointed out, and we haven't seen any material difference in that.

If we don't see an account, we could lose it, of course.

And the other place that we've had a couple of losses over the course of the last couple of years is when a customer doesn't want to deploy it on-prem, but instead wants to deploy it in the cloud.

And that's part of the driver also, to put our solution in the cloud.

So absolutely not at this point in time, I would say it's the same as it's been historically for us.

The only thing is that GBB, one of the main differentiators between GBB as Best, Best is better, one of the main, it's not the only one, is ASM the WAF solution.

So we will take a look at this and when we talk in two weeks time, we'll maybe give you some more data.

Okay.

One other quick question on the server market.

Does the end of support for Microsoft 's Windows 2003, does that play much of a role in terms of your demand drivers?

Is there much of a refresh cycle coming over the remainder of the support contracts there?

This is Karl.

I don't think there's a big impact there because largely we're not tied to a specific operating system.

And with the movement to the cloud, with the rise of Linux, with other things that are going out there with VMware and other things, I think we're more closely correlated to that than we are a specific operating system, or anything around that.

The least we haven't seen anything.

Thank you.

Bill Choi, Janney.

Thank you, and John, also congratulations.

It's been quite a run over the 15 years.

I want to get some sense of what you mean by strive for world-class quarterly performance.

Beginning of last year you certainly set your number one priority in accelerating product growth.

Any way to tie this back into the product growth perspective?

So one of the things we do every year in the Company and we'll be rolling it out actually tomorrow.

But we have something called the vital queue, and we have a number of -- many actions we want to do, for example SDM partnerships.

You could probably guess a number of them.

Then we normally have some financial goals as well.

Obviously just because I'm going to talk about one goal doesn't mean we don't want the other goals to increase.

But the main focus for this year again is product growth.

That's always number one for us.

Okay.

Deciding to partner with Cisco, that was a profound change in your relationship.

I wanted to also get a sense of how much you are benefiting from that relationship.

If you could -- do you have any sense of how big your channel partnerships have gotten?

What kind of ACE replacements you've already had?

Any color that would be great.

Thanks.

The ACE replacement has been extremely significant through the year, very, very strong.

We're haven't got specific revenue numbers to give you, but very, very strong.

The number of add-ons to existing ACE replacements is in the millions quite often, if it's a Fortune 500 organization, so we feel very good about that.

Every QBR, Quarterly Business Review now, one of the things that we ask the sales management to talk about is the relationship with their partners like Cisco and VMware, Hewlett-Packard and Microsoft, companies like that.

Because our whole goal is not just about ACE, it's all about partnering with these companies.

So it's a win-win and they gain something from the relationship and so do we.

The progress on that with the companies I just mentioned has been pretty significant.

(multiple speakers) That's where your larger deals are coming from?

Yes.

A lot of it is influenced by that type of business.

Not all of it, but a lot of it.

This is Manny.

Just to add to that, John mentioned some of the key networking companies there, HP, Cisco, VMware and Microsoft.

We've integrated with all of those companies, our Synthesis Architecture, our software-defined application services layer 4 through 7, with their SDN technology stacks.

So obviously would VMware be something like NSX, but Cisco would be more of their ACI APIC infrastructure, HVN with Microsoft, et cetera.

But we've gone beyond that in those partnerships, in those integrations, in the sense that with certain partnerships we're also integrating with their security stacks, with their cloud stocks.

And we have joint go-to-market and channel motions across the board.

So the ecosystem there is broad.

And the ecosystem there has actual go-to-market activity associated with that.

We should expect continued growth in those relationships throughout the year.

Can you quantify the channel base, how big it's gotten over the year?

No, I don't think we'll qualify that, but quantify it.

But we will, by the way, talk in the lot more detail, and Eldridge just reminded me here, in two weeks time that is a specific agenda topic, as what we're doing with these partners.

You'll hear a lot more about it with some interesting use cases.

Okay, thank you.

This is John Eldridge.

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

Tal Liani, Bank of America.

Hi, guys.

In five of the last six quarters product growth was stronger than service growth, which is always, or sometimes, it's a sign that service growth accelerates over the next few quarters.

Can you speak about the dynamics of services versus products?

And should the stronger product growth be a leading indicator for acceleration of services or not?

Just the puts and takes there, thanks.

Tal, this is Julian.

There is a relationship, it can span over three quarters to four quarters depending on where the product has been sold, whether it's refresh not.

But I think you see the indicator of it in the deferred balance that's grown by 20% and 22% in the last two quarters.

So does it mean that when you look at next year and the following year, I mean without the timeframe and without the numbers, but it means that you're looking for service growth to accelerate?

If I just interpret your -- (multiple speakers)

We're on the bottom now we'll start to see an increase as the reflection of that additional product sales comes in as layers on top of the service sales.

Any reason for the recurring revenue growth as a percentage of sales to also increase outside of the normal services growth?

Can you say that again?

(multiple speakers) Like consulting you're talking about?

So any outside of -- I'm asking if when we go to cloud and we go to different business models of service model or, sorry, software model instead of appliance model, there's also a question about recurring revenues.

I wanted to know what is your outlook for the recurring revenue part outside of the maintenance fee that you're getting on appliances.

What do you think will happen to the recurring revenue part of your business?

So we talked about next week we're going to be launching two subscription services with Defense.

Net and Versafe.

We also have Secure Web Gateway.

We think we'll see, probably later in the year, we'll must see sales as we launch this out, but that's going to go into deferred revenue.

So you're probably going to see over time where breaking that out becomes more of an important metric on deferred subscription revenue.

And similarly if we meet our goals on WAF and the ASM, you're going to see exactly the same.

Got it, thank you.

Georgios Kyriakopoulos, SunTrust.

Thank you.

John, on the Cisco ACE opportunity, you mentioned that less than 50% of the install base has been replaced.

Can you talk about the typical incremental opportunity beyond load balancing?

Again, we'll talk about this a couple of weeks time in a lot more detail.

We've looked to what we believe, from a market share historical perspective, what the current install base is.

We believe it's -- you're going to get more data on this, I don't want to be too specific.

You're going to see much more than $1 billion, $1.5 billion, probably near that number.

I said 50%, we actually think it's a lot less than 50% that's been covered so far.

So we think the opportunity is way more than 50% still out there remaining.

And we'll give you more details than that when we meet with you in a couple of weeks.

Jess Lubert, Wells Fargo Securities.

Hi, guys, thanks for squeezing me in.

Congratulations on a nice quarter.

Couple questions, maybe first for Andy.

With the possible exception of the December quarter, is it fair to assume you'd expect product sales to grow sequentially through the upcoming year?

Yes, and I said that in my prepared remarks, but yes, we do.

And then, federal picked up in the quarter, so I was hoping you could talk about what you saw in the market, how you expect federal business to progress, and to what degree that it was just a function of some fiscal year-end buying?

Or if there's reason to believe we should see continued growth as we go into FY15 in federal?

Dave can answer, give you some more flavor on what we've done in federal.

But remember, that was Q4 of course, just finished September, so by definition that's always been the best growth quarter for us.

So we really expect our federal business to be down in this coming quarter as it always is.

Just so we're clear.

But Dave, do you want to talk about --

I think in Q4, I think we had a very solid quarter in federal.

We actually, toward the end of the quarter, we thought it had a potential to be even larger.

We saw a couple of things.

First of all our business in the civilian and in the intelligence side of federal has been very, very strong, lots of growth and investment.

Certainly our solutions not only around ADC, but around security and cloud are doing very, very well.

In Department of Defense we're certainly seeing a pullback.

Obviously our activities in Iraq and Afghanistan are being pulled back and so Department of Defense is definitely pulling back.

But even with that, we're seeing a lot of opportunities going into this year.

So we're very bullish on this year.

We think intelligence will continue to be a huge driver for us.

As Department of Defense and other agencies start going to cloud and start looking at more efficient ways of delivering services, we think that's going to play very, very well with our strategy.

Like the team, got a very good team, very, very solid outlook inside this year.

Okay.

And then last one for me.

Grantley-based servers are now in the market.

Can you help us understand to what degree the availability of these platforms might drive some incremental customer requirements or refresh activity for some of your products?

The Grantleys add significant performance.

As you know, we have a pretty tight relationship with Intel, so we understand pretty far in advance what's coming what are the specifics of these processors.

In fact, we leverage a lot of their technology, as you know, in our products.

In terms of adoption, it will improve performance, it allows you to run more virtual servers.

You can run more applications, you can concentrate more drives, more traffic into the network and that's all good for us.

What I think it really speaks to is efficiency of the systems on the back end, because really what's driving the traffic, it's not just server speeds, but it's actually things that are happening with mobile devices and what's happening outside the perimeter of the data center that driving these trends.

So it just makes it more efficient.

We expect that helps our case in the data center, if you will.

Thanks, guys, keep up the good work.

Hey, Jess, I wanted to clarify one element to your question that you asked.

I didn't hear when you asked about the sequential growth that you were asking specifically about product.

And we normally don't guide product.

My comments were that total revenue we expect to see sequential growth.

I just wanted to make that clear.

You don't expect sequential product growth for the year?

I didn't say that.

(laughter) Specifically what I thought you were asking and what I was answering was based on what we normally give, which is --

We don't normally give that data, and we still don't.

(laughter)

Okay, all right, thanks.

Okay, thanks a lot.

All right, thank you all very much for joining us.

And I hope all of you can find a way to attend our Analyst Investor meeting on the 13th of November.

Look forward to seeing you there.

Thank you.

Thank you.

That does conclude the call for today.

You may disconnect your phone lines at this time.