F5 Inc (FFIV) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to the F5 Networks first-quarter 2015 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 Mr. John Eldridge, Director of Investor Relations.

Sir, you may begin.

Thank you, Brian, and welcome to our conference call for the first quarter of FY15.

John McAdam, President and CEO, and Andy Reinland, Executive 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 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In addition, you can access an archived version of today's live webcast from the events calendar page of our website through April 22.

From 4:30 PM today until midnight Pacific time, January 22, you can also listen to a telephone replay at 888-673-3568 or 402-220-6431.

During today's call, our discussion will contain forward-looking statements that 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 described in detail in our SEC filings.

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

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

Thank you, John.

Before I start my prepared remarks, I just ask you to be a little patient if I pause.

I've been battling a cough.

So with that we will get underway.

Sales in the first quarter of FY15 reflected the seasonality we normally see at the beginning of our fiscal year.

And in general, we saw fewer large deals this quarter compared to previous quarters.

As a result, revenue of $462.8 million was in the lower half of our guided range of $460 million to $470 million, reflecting 14% year-over-year growth and down slightly from the fourth quarter of FY14.

GAAP EPS was $1.21 per share, above our guidance of $1.10 to $1.13 per share.

Non-GAAP EPS of $1.55 per share also exceeded our guidance of $1.46 to $1.49 per share.

Both GAAP and non-GAAP results include a one-time benefit related to the retroactive reinstatement of the R&D tax credit for 2014 resulting in a benefit to EPS of approximately $0.08 per share on a GAAP basis and $0.07 per share on a non-GAAP basis.

Product revenue of $240.9 million in the first quarter was up 10% year over year, down 6% sequentially, and accounted for 52% of total revenue.

Service revenue of $221.9 million grew 18% year over year, 6% sequentially, and represented 48% of total revenue.

Accounting for 56% of the total, revenue from the Americas was up 14% from the first quarter of FY14.

EMEA, which represented 25% of revenue, grew 20% from the first quarter of last year.

APAC accounted for 14% of revenue and grew 9% year over year, and Japan revenue, representing 5% of total, grew 3% from a year ago.

Sales to enterprise customers represented 63% 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 Q1, we had 4 greater than 10% distributors; Westcon, which represented 17.5% of total revenue; Ingram Micro, which accounted for 16.7%; Avnet, representing 13.9%; and Arrow, which accounted for 11.4%.

Our GAAP gross margin in Q1 was 82.9%.

Our non-GAAP gross margin was 84.1%.

GAAP operating expenses of $251.1 million were within our target range of $245 million to $253 million.

Non-GAAP operating expenses were $222.9 million.

GAAP operating margin was 28.6%.

Our non-GAAP operating margin was 35.9%.

Reflecting the one-time benefit from the retroactive reinstatement of the federal R&D tax credit for 2014, our GAAP effective tax rate for Q1 was 34%, and our non-GAAP effective tax rate was 32.3%.

Turning to the balance sheet, cash flow from operations was $186.4 million.

In Q1, we repurchased just under 1.2 million shares of our common stock at an average price of $128.70 for a total of $150 million, ending the quarter with approximately $1.17 billion in cash and investments.

With the addition of $750 million authorized by the Board for stock buyback at our most recent board meeting, approximately $931 million remains authorized under the share repurchase program.

DSO at the end of Q1 was 50 days.

Inventories were $27.6 million.

Capital expenditures for the quarter were $10.3 million.

Deferred revenue increased 20% year over year to $680.3 million.

We ended the quarter with approximately 3945 employees, an increase of 110 from the prior quarter.

Moving on to Q2 outlook, based on the strength of our current pipeline, including a return in the number of large deal opportunities and continued momentum from our key drivers, we anticipate sequential and year-over-year growth in the second quarter of FY15.

Our revenue target for the quarter is $465 million to $475 million.

GAAP gross margin is anticipated to be in the 82% to 82.5% range including approximately $3.5 million of stock-based compensation expense and $2.7 million in amortization of purchased intangible assets.

Non-GAAP gross margin is expected to be in the 83.5% to 84% range.

As outlined during our Q1 earnings call, we anticipate an increase in stock compensation in Q2 related to the timing of our annual employee grant.

As such for Q2, we anticipate GAAP operating expenses in the range of $255 million to $264 million including approximately $34 million of stock-based compensation expense and $0.5 million in amortization of purchased intangible assets.

For Q2, we are forecasting a GAAP effective tax rate of 38.5% and a non-GAAP effective tax rate of 35.5%.

These rates assume no reinstatement of the federal R&D tax credit for 2015.

Our GAAP EPS target is $1.07 to $1.10 per share.

Our non-GAAP EPS target is $1.48 to $1.51 per share.

We plan to increase our headcount in excess of 100 employees in the current quarter.

And we believe our cash flow from operations will be at or around $110 million reflecting the impact of two federal tax payments that we normally incur during our fiscal second quarter.

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

Thanks, Andy, and good afternoon, everyone.

Although our revenue came in at the lower end of our guidance, and I'll comment on that in a moment, I was pleased with the significant progress we made in all our major initiatives.

For example, we had some very strategic security sales wins in the cell provider market; we had a very successful launch of Silverline, a key component of our hybrid application services strategy; we added significant functionality to our orchestration and management product BIG-IQ, which was key to winning the strategic security wins and is also another critical component of our hybrid application services strategy.

We also continued to make great progress with our SDN partnerships, both in technology and in go-to-market initiatives.

From a sales perspective, the majority of the shortfall occurred in the Americas region where we experienced a larger than expected drop in $1 million-plus deals in both large enterprise and US federal opportunities.

We believe this was a seasonality issue due to a very large number of large wins closing during our fiscal year end Q4 drive.

On a more positive note, the pipeline creation rate in Q1 was very strong and, I'm sorry -- was very strong, and the pipeline for the quarter looks very, very good.

Sorry.

I missed out a sentence there from the original I had.

Our Japan business was also below our intended forecast but this was not a major factor overall.

Both APAC and EMEA delivered year-over-year sales growth.

The EMEA region was the star of the quarter and once again delivered an excellent performance with solid year-over-year growth.

Our services business continued to deliver solid results and excellent profitability along with a healthy increase in deferred revenue, which is now approximately $680 million and should bode well for future business.

We continue to experience strong momentum with our Good, Better, Best sales model in Q1 with customer adoption continuing to be very strong in the Best category highlighting the success we have seen with our security solutions.

I was also very encouraged by the continuing strong growth of our software revenue which increased 44% year over year.

The fastest-growing area in our software businesses is our core virtualization ADC.

Our software growth has been driven by the increasing customer demand for hybrid solutions that allow greater flexibility in the deployment of application services within and across data centers and into the cloud.

Our ability to provide our solutions as virtual software-only offerings across all the major hypervisors, combined with our unique orchestration functionality in BIG-IQ, is enabling customers to move to software defined data centers and NFV architectures.

We're also seeing growth across the entire portfolio of our software modular offerings driven by the rapidly increasing recognition that an ADC is the ideal platform to ensure application security.

Our security business continues to be our largest growth driver with strong sales across the security solution portfolio including ASM, APM, and AFM.

I already made reference to strategic security sales wins in the service provider market.

We won a large AFM Gi firewall sale with a T1 service provider which resulted in two transactions in Q1 being over $1 million each in value.

I have mentioned several times last year that our BIG-IQ security management and orchestration product road map was being influenced by a Tier 1 service provider in North America.

This initiative has proved to be very successful and we are now starting to see some real momentum globally with our Gi firewall solution, and we believe it can be a strong growth driver in FY15 and beyond.

Overall, we had a solid quarter in the service provider market in Q1.

We had several very strategic wins over and above the Gi firewall deals.

For example, we won a large $2 million-plus software only NFV application with another Tier 1 service provider North America.

Our consolidation strategy and focus on security, NFV, Gi run services, and LTE applications is resonating well with the service provider as we offer them the opportunity to reduce OpEx while monetizing the value added services with our unique application and subscriber awareness.

We continue to see strong sales of Cisco ACE replacements last quarter.

As we have seen in previous quarters, customers continue to take the opportunity to add additional functionality.

For example, our ASM and or our AFM security modules when they implement the new AFI solutions.

We have created a self-service web portal for ACE migrations which complements our significant experience in consulting expertise and increases our competitive advantage.

Also, we intend to step up our market initiatives on the ACE opportunity starting this quarter to take advantage of our current momentum and experience in transitioning ACE customers to AFI ADC solutions.

We have experienced a very positive reaction to the launch of our Silverline hybrid application services strategy from our sales force, partners, and customers.

The initial launch included our subscription-based DDoS service and our anti-malware and phishing protection service.

These cloud-based offerings deliver flexible best-in-class services and offer a hybrid model complementing F5 on-premise products and solutions.

We have already seen some excellent orders for both our subscription-based DDoS service and anti-malware solutions.

We are planning to increase support fully on cloud-based subscription services starting with the WAF ASM solution in the next few months.

From a product perspective, we have a host of new functionality and new products on our current road map.

We recently released a new high-end 2U platform, the BIG-IP12000.

This platform extends performance of our current 10000 platform by 25%, increases SSL performance by 600%, and more than doubles the number of high performance vCMP instances.

The SSL performance is really important given the SSL everywhere trend that we are seeing.

In the near future, we will be enhancing our management and orchestration capabilities with BIG-IQ release 4.5.

This release will include significant enhancements for our data center security products, AFM and ASM, as well as comprehensive support for our SDN ecosystem to provide application management capabilities within SDN enabled networks.

The BIG-IQ cloud module now supports SDN controller integration with Cisco Apex, VMware NSX, Alcatel Mirage, Microsoft SCVMM, and OpenStack.

We will also be adding a new module, BIG-IQ ADC.

BIG-IQ ADC provides centralized fine grain application management across cloud-based SDN and traditional network infrastructure.

The drivers of our business remain robust, and I expect momentum to build in this coming quarter and continue into the second half of the year.

Our hybrid application services based on our Synthesis architecture and Silverline cloud services is resonating really well with our customers and partners.

This strategy, combined with the strength of our partner ecosystems in areas like SDN, provide 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 architecture.

Also, our portfolio of application products and cloud services continues to expand aggressively which in turn significantly expands our addressable market and increases the type of revenue streams available to our sales force and partner channel.

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

As I mentioned earlier, our business pipeline create rate was very strong in Q1, up significantly over the previous year and the pipeline of business this quarter looks been strong.

In particular, we have seen a large increase in the number of large deals in the pipeline.

We continue to plan for growth in the business by investing in headcount and infrastructure moving forward whilst delivering world class operating margins.

I continue to feel very positive about future business prospects for F5.

I believe as our existing product portfolio, our hybrid application services strategy, and our product road map are not only in line with customer market trends but are also key to enabling these trends.

In conclusion, I would like to thank the entire F5 team of partners and customers for their support last quarter, and with that, we'll hand the call over for Q&A.

(Operator Instructions)

Jayson Noland, Robert Baird.

Great.

Thank you.

John, any additional color on the large deals?

I know you said fed but is there a certain vertical you would call out?

And was complexity part of it, just confusion around architectural change?

No, we've obviously checked in a big way and really -- and this is going to sound weird, but really there was nothing complex that we could see.

We just saw the more we looked at the pipeline going through the quarter, you could see that the forecasted deals weren't moving along as fast as they should.

This is only in the Americas, by the way, and the enterprise and federal, as well.

So no vertical that stood out.

Just generally across the board.

Remember, we're not talking about a significant number of $1 million deals, but they obviously make a difference.

And those didn't become smaller deals.

They just got pushed out into FY Q2?

Correct.

Yes.

Thank you.

Ehud Gelblum, Citigroup.

Sorry, guys.

Thanks, John.

I had trouble getting off the mute button.

Just wanted to clarify a couple things, John.

You talked about software, 44% growth.

That was -- you were talking about Virtual Edition software, right as opposed to software total.

So 44% was the total software and within that and that includes virtualization and that includes modules in areas like vCMP within the ADC solution.

And the other thing I said was that the fastest growing was the virtualization ADC.

However, the security module software is a pretty significant part of that growth as well.

Cool.

Could you give us a sense of that, how large is the security module part of that?

No.

We don't give out the specific -- I actually don't have in hand anyway but we typically don't get that out.

Security, you're going to hear me talking again about that in the call.

That still remains the biggest driver and I think that's going to be the case for a while.

Okay, interesting.

I did want to drill down a little.

If you take the Gi Firewall, for example, these were pretty significant deals and of course the security module EFM associated with them, and that's pretty expensive.

Totally.

I just want to drill down a little bit on some of the Gi firewall wins.

You talked about wins in Tier 1 service provider for that.

Can you give us a sense as to who you beat out?

I can guess.

Is this beating out Juniper SRX or who were you beating out?

And were these new opportunities that you were brought in for or was this an existing opportunity where you replaced someone, and if so, was it for functionality, features?

Give us a sense as to what that opportunity looks like.

So typically, the ones I was talking about specifically on this call and we have seen Gi firewall deals over worldwide.

The ones I was referring to were US Tier 1 providers and nobody mentioned customer names, of course.

The $2 million-plus Gi firewall deals were directly related to -- frankly, I think it's about two years we've been working with this particular service provider on our orchestration road map.

So that's the initial orders on that opportunity and that could be big obviously as long as we execute properly.

Can you give a sense as to who you beat out on that?

Was there an incumbent there?

An incumbent typically in the [idian] and the US is [jerica].

It's not always been that in some of the replacements but that's typically the incumbent.

Okay.

I'll take the rest offline.

One last thing.

I wanted to ask about services.

Services obviously were very, very strong.

There is obviously a renewal period that happens but between deferred revenue and a large jump in services, is there any global comment we can get a sense on as to what made the jump so strong in services?

On the revenue side, the jump was -- we've seen for a number of years our clients go for coterminous contracts for the first of January and the first of July.

This quarter obviously ended with the first of January.

We had a very strong push and we were able to recognize more revenue within the quarter and as part of that push, we built out the deferred revenue.

So through January 1, how did you recognize it again in the December quarter?

So because contracts end for January 1, you're trying to get them to renewal before that date and because they are coterminous some of the units have not been on support for two, three, or four months so we get some back dated revenue in there at the same time.

Interesting.

Okay.

I appreciate it.

Thank you.

You're welcome.

Kent Schofield, Goldman Sachs.

On the $1 million deal idea, can you talk a little bit about -- it just seems like you've been talking a little bit more about large deals.

Is this a function of some of the new products?

Some of the bundling?

Is this just something that we should think about more going forward in terms of having these larger deals in the mix?

No.

We don't think so.

If you look at last fiscal year 2014, we saw a pretty significant rebound in the large $1 million-plus deals every single quarter.

Obviously, we saw a blip in our Q1 earning in December and having said that, we expect to see that rebound given what we are looking at A, in terms of some that up slipped, and B, the creation rate that we've done in Q1 which was pretty solid.

So we expect the $1 million numbers to become strong again in the coming quarter.

And is some of that closing the deals from the December quarter?

(multiple speakers)

Some of it's that and some of it's new deals with a -- I mentioned a pretty strong create rate.

Okay.

Thank you for that.

Brian White, Cantor Fitzgerald.

John, wondering when did the pipeline start to shrink for the quarter?

When do you start to see the weakening?

Your analyst day was obviously pretty upbeat so was this kind of a late December phenomenon?

The pipeline itself doesn't shrink.

In fact when you start to see deals slip, you actually see the pipeline create.

What we saw was fact of pipeline deals that we were expecting to close not quite coming in and then slipping out into the next quarter.

Okay.

And that tends to happen towards the end.

And could this simply be the phenomenon, we're following up fiscal year end, we've seen this before, fiscal year end you overshoot a little bit in the fourth quarter and then it takes away from the next quarter?

And that's exactly what I say in my script is we believe what happened.

Okay.

Great.

Thanks.

Michael Genovese, MKM Partners.

Great.

Thanks very much.

John, in the past in some of the quarters when the $1 million deals have gone down, you've talked about that being an indicator of macro so, but this time you are really just saying it's seasonality.

So if you could talk about that why you are convinced there.

And then secondly, is there an element of needing a little bit of a reset here of coming in a little bit lower?

Is there any element here of this transition to a kind of an on demand software and virtual model?

Did that play any part in the miss in the quarter?

Right.

So by the way, we were in the guidance in the quarter remember.

I know that's not good because we tend to beat but just to be clear.

On the first part, you're absolutely right.

If you go back to 2013 when we saw a fairly precipitous drop in $1 million deals, we did talk about macro and refer to macro more than once in that case.

And that's because when we looked at that, the forward-looking pipeline wasn't anything as strong as it's looking today.

So we're seeing this is a definite scenario in our opinion where we really believe this was more seasonality link than anything.

And a piece of fed as well where there's clearly some lack of transparency in fed and we'll know that that budget hopefully that will improve.

They were the two things that we see.

As we look forward, we see a stronger pipeline with a higher percentage of factoring in the pipeline hence I was not referring to macro.

And the second question was?

Oh, yes.

The transition from us to software.

No.

We don't see that.

In fact, interestingly enough these software deals that we see from a virtualization perspective or from an NFV perspective, these are big.

These are actually pretty big deals as customers are horizontally scaling the cost of application and therefore buying a lot of instances of virtualization.

So maybe over time we'll see that but I don't believe that that was an indicator in this quarter.

We just have one follow up.

With these large virtualization deals, is there any change in the competitive landscape?

Any new competitors that you don't traditionally see competing for these deals?

Michael, this is Manny.

No, absolutely not.

What we're seeing is -- we're basically seeing the need depending on whether it be an enterprise or service provider.

Of course customers who want to go to software-only architectures.

In general there are some newer competitors sometimes in the market but it tends to be the same constant competitors who have offered a hardware version and the software version.

Thanks very much.

And remember with these virtualization deals, we have the same concept, Good, Better, Best.

We have modules.

We have iRules.

All of the competitive functionality we have, we have in the software side as well.

Bill Choi, Janney.

Okay, thanks.

On the large deals again, I guess I'm curious because there are so many things happening between hardware moving to also support virtual editions tying with SDN, your products becoming more software.

Again, how much of this might be more product specific, the deals getting more complex?

It does seem like you've got a lot of new technology to think about and Cisco did have some weakness in its billings for the October quarter.

Guys like VMware also had some choppy bookings.

So I'm curious as you look at the complexity of products, can you really attribute any of that to the complexity?

Really I don't think we can.

I just don't think we can.

It's basically the deals are there.

We understand them.

They're very similar to what they were in Q4 where we had a massive push with large deals.

And we don't see any change in that landscape whatsoever.

And one of the factors that impacts growth rate was that you refreshed all of your product line a little over a year ago, so last year we enjoyed quite a bit of acceleration in growth rate coming off of tough comps.

Are you seeing any impact from just the pent-up demand maybe that was created from the product cycle and just things slowing down after people went ahead and did the refreshes?

Any thoughts on that as a driver?

You know, we thought about that and if you look at the drivers and it's probably worth looking through them again just to summarize, but obviously product refresh we've talked about there.

Was there low hanging fruit at the beginning that's not quite there at the moment?

Probably.

Do we still have a very large installed base of products that we can refresh?

Absolutely.

So I think there's that area.

Obviously, the 1200 with its SSL capability I think is clearly -- it's one point product but its -- with its SSL capability that's a pretty good opportunity to refresh as well.

But the big drivers are security with the firewall that we talked about, ASM with the WAF solution or DDoS on prem and off premise.

And NSF service provider we feel very good about the drivers there from an NFV from a security perspective, TCP optimization.

We still feel good about ACE.

I mentioned about what we're going to there and the SDN partnerships and in general, the [clothe movement I think is a growth possibility for us.

So product refresh probably to some degree but we still think there's a big opportunity there.

Okay, last question.

Given the growth in pipeline partly the new creation as well as deals slipping, with your guidance that product growth rate is -- continues to decelerate to somewhere near high single digits when you looked at your guidance.

How do you get this back up and why isn't the guidance for the March quarter better just given the buildup of the $1 million-plus projects?

Thank you.

Historically last quarter you need to be careful with that because it's always the beginning of a financial year for a lot of companies.

We're assuming, I hope, relatively conservative growth rates in the factor pipeline and we'll see where that takes us.

Subu Subrahmanyan, The Juda Group.

Thank you.

Two questions.

First on the service provider side, if you could talk about given the CapEx backdrop you certainly have some wins and share gain opportunity, so how do you think about the service provider vertical for this year?

Do you expect it to grow as a percentage of revenues in FY14?

And then on the virtualization side, I certainly hear you, John, that the deals are large but if you do a comparison with the architectural changes, if you had sold all hardware instances as you might have a few years ago versus a mix of hardware and software, what that is doing to the overall dollar value of the deals and also the profitable yield of the deals.

That would be helpful.

So, this is Manny.

Let me answer the service provider.

On the service provider, we have four major drivers that I think we talked a little bit about that were definitely in John's prepared comments, which is consolidation across the board from a service provider point of view and that's consolidation of services predominantly traffic-steering services, [carry grade] map services, and some other services in there that we are consolidating inside that environment.

That reduces CapEx relief for many of the operators that are out there because they are going from multi vendor to single vendor.

The second major driver we have is security, which is also something we can overlay on that same footprint, again, from a consolidation point of view.

But we call that out as a separate driver because it's just the impact from the side associated with that.

The third is NFV and the NFV footprints that we see out there which are still early proof-of-concepts to some degree and we are in various proof-of-concepts across the world.

We're starting to see some of those pan out, and that's what happened this past quarter and why we got a big bump also on our software sales.

And the last is the LTE or the mobility movement going to 4G networks, which we've been seeding in the customer environment for the last two years.

And we're starting to see there also from a driver perspective is that these networks get deployed, get accepted, usage volume goes up, new devices are being enabled meaning additional mobile handsets, but also new devices from the perspective of the Internet of Things that we're going to see additional software license there.

So those are predominately the four major drivers and those are usually either tackling the CapEx line from a consolidation point of view or the monetization line from something along the perspective of LTE and being able to bring on new services to the market.

And on the virtualization side of things, which I think is very similar to the answer I gave to a similar question which was basically -- first of all, these are still small numbers.

This is still a relatively small market versus overall ADC market, but the deals that we're seeing are pretty large in nature.

We need to market exactly to see the difference if it was all hardware versus all software.

I'm not sure we would see much difference quite frankly.

So I don't think that's a -- if you're looking for is that a factor in what happened in terms of bringing us to the lower end of the range, we don't think so.

And just to add one more comment, Manny again, on the software side that we see is we see an expansion of the application needs in the market segment.

What I mean by that is historically a handful of applications in the typical enterprise or service provider got the ADC services because it was hard to deploy much more complex.

As we move toward a much more software-based architecture, what you see is a broader set of applications getting these services because it's easier to deploy those services in the environment so it's actually to a large degree an expansion in the market.

All right.

Thank you.

Brent Bracelin, Pacific Crest Securities.

Thanks.

Two quick follow-ups, if I could.

On the $1 million deals, if you look across the broader enterprise, we've actually seeing a trend towards and you did as well up until this quarter, an increasing number of larger deals that closed.

Do you think what you saw in December was company specific or do you think there were other factors here at play?

And I have one follow up.

Yes, that's a really hard one.

We don't know the answer to that.

We just don't know the answer.

I think as more companies announce that there might be some more news there but I certainly wouldn't call out and that's why we're not calling out as macro either, quite frankly.

I mean the other side of the coin is that that create rate we had is probably the biggest create rate we've seen, if not the biggest.

And certainly one of the biggest and I'm talking about large deals.

So yes, time will tell in terms of whether it's a bigger issue or not.

Okay, fair enough.

And then the follow-up question is back to software and as we compare/contrast the software growth rate versus your reported product growth rate, it was 44% software growth rate this quarter versus 10% product growth.

If I look at your analyst day, you talked about I think 41% security software growth rate versus 17% product growth rate so there's a widening gap there between the growth in software versus product appliance overall.

Why shouldn't we expect slightly more tempered growth going forward with the mix shift of software given the trends over the last couple of quarters, and frankly now, given some of the announcements around new products where you're going to be pricing those products on a subscription basis?

Well, I think if you take a medium to longer term view, that's correct.

That is absolutely correct.

You're going to see us selling more and more software.

We've done that now.

We've pushed the sales force to do that.

It's a competitive edge.

It's obviously very, very profitable.

We think we're in great shape in terms of our BIG-IQ orchestration for managing software across clouds and clouds across data centers, et cetera.

So you will see that.

I don't think it's going to be a complete revolutionary process.

I think it's going to be evolutionary.

If you look at the -- it's interesting if you look at the Gi firewall opportunities.

The software content in that of course is very significant but so is actually the hardware content because it needs to cope with a significant amount of traffic either on the DDoS side of things or just in pure mobile traffic firewall protection.

I think the trend is going to be there but to pick one quarter from Q4 to Q1 and say that's a trend I think would be very dangerous.

We don't believe that.

Fair enough.

Thank you.

James Faucette, Morgan Stanley.

Thank you very much.

Most of my questions have been answered so I want to dig a little bit just around more of the edges, if you will.

First wondering if you can talk a little bit about what you think was happening in Japan and APAC.

You called out that Japan was a little bit below your forecast.

And then conversely, what you think was going right in EMEA in particular with the weakness of the euro.

Seems like that could have been subject to a little more weakness than what you saw.

And I guess as a follow-up to that, is there going to be a point at which you feel like you will have to reprice products f that market and how should we take that into account?

Thanks.

Let me start with EMEA because that's an easier one.

EMEA, in my opinion, is tremendous execution, and we have great management there.

They been covering the territory really well.

They're selling big deals.

They're selling our software capabilities.

They've internally always had a very strong leaning towards security and they very elegantly in fact led that march so I think we're talking execution.

I think in Japan is different.

Japan still tend to go for a smaller type products.

We're not quite as competitive there.

We've been spending a lot of time trying to get that direct business up.

In other words, that top I should say still with partners but direct touch.

We've made some progress but it's pretty slow and generally the economy is quite slow.

In APAC we've been doing some changes -- some management changes.

We actually feel good about the trajectory APAC is on.

So back to Europe looking forward is, do you feel like you're going to -- I know for a lot of other vendors is that they've had to or they have asked their resellers and buyers to absorb at least some of the impact of the depreciating euro but wondering if you feel like you're going to have to change pricing into that market and then how we should take that into account or are you going to be able to basically put through effectively price increases to those customers?

Historically when we've have seen fluctuations in currency because we bill US dollars principally in EMEA and we've been able to navigate that working with the partners and the resellers.

Conversely they've benefited at times when it's gone the other way.

I'm not sure we would necessarily do a change in price strategy from that but we will as we execute through the quarters take that into consideration as we look at deals and work with the partners and resellers to close business.

Thank you.

Excuse me for interrupting.

This is John Eldridge.

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

Catharine Trebnick, Dougherty & Company.

Thank you for taking my question.

Can we go back to the service provider for a minute?

And any of the NFV, are you seeing just to give more color around this, you said proof of concepts.

Have you deployed -- has there been any deployments with NFV, et cetera?

And then the follow-on question has to do with the enterprise spending.

So first if we could have some color on NFC with carriers?

Thanks.

Hello, Catharine.

It's Manny.

On the NFV side, we have close to 2000 proof-of-concepts throughout the world, just to give you a size of the magnitude of the transactions and those are across all of the theaters.

The wins that we've recently seen, which vary across two of the theaters, are predominantly security related wins where we are taking our security products from a software perspective and introducing them inside that environment.

Obviously, they expand beyond security.

They are also our traffic-steering, CGNAT type of deployments, but they are going into the concept of beginning to consolidate services or on a virtual EPC, and a lot of the providers are moving in that direction fairly quickly so we're doing well in that environment.

We're integrating our stock with lots of different SDN providers in the market segment and that gives us a lot of flexibility to work with those operators.

So it's early days but we're seeing a lot of good momentum, a lot of good traction, and proof-of-concepts are going favorable.

Okay, perfect.

Thanks.

I'll let the next one get in.

Tim Long, BMO Capital Markets.

Thank you.

I'll try to sneak two in here, if I could.

First on the Good, Better, Best.

Just love an update there.

You've talked a little bit in the past.

We know the Best option is doing well, but could you talk a little bit about the metrics there?

How broadly is it through the sales force now, is it fully everywhere, how many deals is it influencing, are we still seeing growth from that, are we starting to reach a more full penetration?

And then the second one, John, I think you mentioned something about factoring the large deals a little bit more into next quarter.

I guess part of that is conservatism but I'm just curious if given the uncertain macro, are you also as a team factoring in the rest of the business, the sub-$100 million deals more than normal as well in the guidance?

Thank you.

Okay, so on Good, Better, Best, the metrics are very similar.

I mentioned it's still gravitating greatly towards Best.

In fact, I think this quarter we were even higher in terms of a percentage towards Best.

If you look at where we are in the process, North America was first out of the chutes and they've been pretty aggressive in selling that.

We started then a couple quarters later, one to two quarters later, seeing EMEA starting but they've got more room to do to catch up.

And then APAC and Japan in particular, a lot of tend to lag a bit with pricing changes like this, so we expect that to start to rev up in the future as well.

And in terms of the factoring, yes.

Actually, when we do have factoring, we don't tend to just factor by size of deal.

We look at the overall factor.

We look at the fact of pipeline and then we look at close rate expectation so that tends to run right across the low deals right up to the high deals as well.

Okay.

Thank you.

Okay.

Thank you very much for tuning in and we look forward to talking with you again next quarter.

Thank you.

That does conclude the call for today.

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