F5 Inc (FFIV) 2016 Q3 法說會逐字稿

Good afternoon and welcome to the F5 Networks third-quarter FY16 financial results conference call.

(Operator Instructions)

Also today's conference is being recorded.

If anyone has any objections, please disconnect at this time.

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

Sir, you may begin.

Thank you, Sam.

Welcome, everyone, to our conference call for the third quarter of FY16.

John McAdam, 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, F5.com.

In addition, you can access an archived version of today's live webcast from the events calendar page of our website through October 26 from 4:30 PM today until midnight Pacific time July 21, you can also listen to a telephone replay at 800-944-3543 or 402-998-1738.

Our discussion today 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 on our quarterly release, and described in detail in our SEC filings.

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

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

Thank you, John.

F5 delivered solid revenue results and strong profitability in the third quarter of FY16.

Revenue of $496.5 million grew 3% sequentially, and 3% year-over-year, and was in the upper end of our $490 million to $500 million guided range.

GAAP EPS of $1.37 per share was above our guidance of $1.29 to $1.32 per share.

Non-GAAP EPS of $1.81 per share also exceeded our guided range of $1.77 to $1.80 per share.

Product revenue of $231.4 million, up 3% sequentially, and down 7% year-over-year, represented 47% of total revenue.

Service revenue of $265.2 million increased 3% sequentially, and 13% year-over-year, and accounted for 53% of total revenue.

Americas accounted for 56% of total revenue during the quarter, EMEA contributed 24%, APAC 15%, and Japan 5%.

US revenue was down slightly year-over-year, reflecting relatively weak telco spending, and EMEA was down 1%, as a result of softer than expected UK sales.

By contrast, APAC revenue grew 20%, and Japan revenue was up 15% from the third quarter of last year.

Enterprise customers represented 64% of total sales during the quarter.

Service providers accounted for 21%, and government sales were 15%, including 6% of total sales from US Federal.

In Q3, we had three greater than 10% distributors: Westcon, which accounted for 18.8%; Ingram Micro, which represented 14.9% of total revenue; and Avnet, representing 13.7%.

Our GAAP gross margin in Q3 was 83%.

Our non-GAAP gross margin was 84.5%.

GAAP operating expenses were $273.3 million, at the low end of our guided range of $270 million to $279 million.

Non-GAAP operating expenses were $239.2 million.

GAAP operating margin was 28%, our non-GAAP operating margin was 36.3%.

Our GAAP effective tax rate for Q3 34.4%.

Our non-GAAP effective tax rate was 32.9%.

Turning to the balance sheet, cash flow from operations was $170.5 million.

In Q3, we repurchased approximately 1.4 million shares of our common stock, at an average price of $107.18, for a total of $150 million.

$924 million remains authorized under the share repurchase program.

We ended the quarter with approximately $1.1 billion in cash and investments.

DSO at the end of Q3 was 48 days.

Inventories were $33.8 million.

Capital expenditures for the quarter were $16.1 million.

Deferred revenue increased 15% year-over-year to $856.2 million.

We ended Q3 with approximately 4,325 employees, up 5% year-over-year, and flat with the prior quarter.

Onto our Q4 outlook.

In his prepared remarks, John will discuss a number of new wins that reflect increasing adoption of our application delivery and security services for public and private cloud architectures.

In addition, we are confident that the new products released in Q3, and those we are rolling out this quarter, including the BIG-IP appliance refresh will become meaningful drivers of the business over the near and mid-term.

These, combined with the progress we've made in sales leadership and improving sales execution over this past year, give us confidence as we look to Q4 and beyond.

Our revenue target for the fourth quarter of FY16 is $515 million to $525 million.

GAAP gross margin is anticipated to be in the 83% range, including approximately $4.5 million of stock-based compensation expense, and $2.7 million in amortization of purchased intangible assets.

Non-GAAP gross margin is expected to be at or around 84.5%.

We anticipate GAAP operating expenses in the range of $276 million to $285 million.

This includes approximately $35.5 million of stock-based compensation expense, and $0.8 million in amortization of purchased intangible assets.

For Q4, we are forecasting a GAAP effective tax rate of 36% and a non-GAAP effective tax rate of 34%.

Our GAAP EPS target is $1.44 to $1.47 per share.

Our non-GAAP EPS is target is $1.92 to $1.95 per share.

We plan to increase our headcount by 75 to 100 employees in the current quarter, and we believe our cash flow from operations will be at or around $185 million.

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

Thanks, Andy, and good afternoon, everyone.

Overall, I was very pleased with F5 team's fiscal Q3 performance.

We delivered year-over-year revenue growth with strong profitability, operating margins, and cash flow, in what continues to be a relatively challenging business environment.

From a sales perspective, both Japan and our Asia-Pacific regions delivered double-digit year-over-year sales bookings growth.

Sales bookings in our Americas regions were down year-over-year compared to a strong Americas booking quarter in Q3 FY15.

We experienced softness in the service provider vertical, especially with some of the Tier 1 telco operators.

However, the Americas sales results were above our internal forecast, and I was pleased with the progress we are seeing in overall sales execution in the region.

Sales bookings in EMEA were also down year-over-year, driven by weaker than expected results in the UK.

Once again, our services business continues to deliver strong results and excellent profitability, with year-over-year revenue growth of 13% and deferred revenue growth of 15%.

Overall, software revenues were very solid in Q3, accounting for 38% of overall product revenues with excellent growth in software sales, and to public and hybrid cloud architectures.

Software revenues include VE versions of TMOS and VE solution modules, as well as solution modules shipped on our appliances and our VIPRION range of products.

Security sales were up sequentially over Q2, with a number of excellent security wins across the entire portfolio of our security solutions.

For example, a large financial services company used F5's SSL intercept capabilities to provide visibility to encrypted outbound traffic, and protect against a collection of both known and unknown advanced attacks.

This solution included service chaining of other vendors' attack detection capabilities, including FireEye and Palo Alto Networks, and further demonstrated our openness and integration capabilities.

Another excellent security win, driven by the Internet of Things trend, involves a large Fortune 500 Company leveraging our TCP optimization and WAF capabilities to scale and secure a 10,000-plus IoT deployment.

A large bank in EMEA acquired our best BIG-IT bundle to provide service consolidation of several critical functions: single sign-on, WAF, and DDoS mitigation.

The customer also purchased our WebSafe anti-fraud product.

The resulting solution had a material performance edge over competitors, was significantly less expensive to deploy, and allowed the customer to realize substantial ongoing savings, due to the elegance and simplicity of F5's solution.

We also have increasing confidence, following several excellent wins in the hybrid private and public cloud environments in Q3.

When our existing customers initiate lift and shift programs to move applications to the public cloud, they continue to view functionality such as programmability of the iRules as critical for application optimization and application security.

Similarly, new customers are implementing solutions such as our APM and WAF modules to secure their cloud-based applications.

Some examples of hybrid and public cloud wins last quarter include a multinational pharmaceutical company, which elected to migrate its employees to the cloud-based Microsoft Office 365 platform, and used F5's APM identity and access capabilities to enable single sign-on, and native BIG-IP functionality to encrypt Active Directory credentials.

Similarly, a market-leading SaaS vendor selected our BIG-IP Virtual Edition to support their AWS customer-facing application.

These VE instances were sized to support up to 200 megabits per second of throughput, and were provisioned using only the native point and click capabilities of the AWS marketplace.

A large Department of Corrections organization replaced their legacy on-premise ADC vendor for F5, and performed a lift-and-shift migration to the AWS Cloud, incorporating a 200 megabits per second BIG-IP LTM solution, together with an F5 application firewall.

Lastly, a global executive search and placement agency embarked on a project to migrate a large cluster of on-premise virtual machines to the Microsoft Azure Cloud.

A smooth cloud transition was engineered by embracing a hybrid multi-step migration plan, and by leveraging F5 and the Azure Cloud to manage all application delivery and persistent connection requirements.

Last quarter, we introduced a number of new solutions and features into the market.

In Q3, TMOS version 12.1 was released, with next-generation programmability features, designed to meet the emerging needs of the DevOps community.

TMOS 12.1 also provides leading application services, with enhanced public cloud integration, and sophisticated security policies for on premise and hybrid cloud environments.

We also announced availability of our new FIPS security appliance, which not only meets the US Federal Information Processing Standards, but also enjoys an eight-fold increase in SSL performance over the existing solutions.

In June, we began shipping a 100-gig blade enabling the first terabit class ADC.

This product focuses on the service provider market, offering significant performance improvement, with Gi LAN applications such as the Gi firewall and traffic seeding.

Based on orders already taken, combined with a growing pipeline, we see demand ramping for the 100-gig blade in this coming quarter, and into 2017.

We delivered our latest management and orchestration product, BIG-IQ version 5.0, and iWorkflow version 2.0.

BIG-IQ 5.0 delivers significant scalability improvements, and centralized management for all our security products.

F5's new iWorkflow 2.0 platform, available as a virtual appliance, accelerates the deployment of applications by orchestrating traffic management and security and hybrid cloud and SDN deployments.

Finally, we also delivered our new purpose-built appliance, called DDoS Hybrid Defender.

This purpose-built DDoS solution is the first in a new line of purpose-built security appliances.

The DDoS Hybrid Defender is the only DDoS solution in the market that provides high performance and true multi-layer DDoS protections for applications, protocols, and the network.

Included in this solution is sophisticated application attack defense, with in-depth behavioral analytics, full SSL decryption, and the ability to integrate on-premise DDoS protection with optional cloud-based scrubbing via the F5 Silverline service.

In this current quarter, we start the process of delivering a range of new appliances with the target of completing a comprehensive appliance refresh by the October or November timeframe.

As you would expect, the new appliances, known internally as the Shuttle series, significantly improved performance, decreased total cost of ownership, and increased our competitive leadership position.

However, the Shuttle series is much more than a simple product line upgrade.

We believe that the Shuttle series is the world's most programmable flow-ready ADC.

The Shuttle series provides the agility that DevOps organizations demand, together with the scaled security investment protection that our traditional customers have long enjoyed.

Our high level goal with the Shuttle series is to better meet the capacity, the rapidly changing needs of the additional IT buyer, the DevOps community, and the growing ranks of enterprise cloud architects.

We also plan to ship a new standalone SSL intercept product this quarter, called the SSL Orchestrator.

The SSL Orchestrator provides critical visibility into industry blind spots created by the growing use of encryption through our enterprise networks.

This product combines industry-leading cryptographic capabilities, with context-aware dynamic service chaining.

It provides enhance in policy enforcement capabilities, sophisticated bilateral detection capabilities, and improves network operations and orchestration.

We've already seen a rapidly growing requirement for this functionality.

As far as the FY16 Q4 outlook is concerned, Andy indicated that we expect to deliver revenue in the range of $515 million to $525 million for this quarter.

Given the political events in Europe last quarter, combined with the relatively soft spending environment overall, we believe it is prudent to remain cautious in the short term.

That being said, I believe we have made progress in a number of areas this year, that will result the growth of our business as we close FY16 and had into FY17 in October.

I also have a couple of organizational comments I want to share with you today.

We managed today the appointment of a new Chief Marketing Officer, Ben Gibson.

Ben's 25 years of management experience in enterprise IT and security makes him a natural in fit for the F5 team, as does his exceptional track record of demand and brand creation, and close partnership with both sales and product leadership.

Ben joins us from Veritas, where he led the Company's rebranded efforts, following the spin-off from Symantec.

Prior to Veritas, Gibson spent five years as a Chief Marketing Officer at Aruba Networks.

Before joining Aruba, Ben held VP roles at Cisco, where he led a number of marketing teams focused on data center, application networking, and enterprise mobility technologies.

With his official start at F5 on August 1, Ben's top priority will be on supporting our product revenue growth plans for the fiscal year ahead, and I expect he will bring new creativity and discipline to our product, field, and channel marketing programs, as well as advertising, digital strategy, and corporate communication initiatives.

As I have mentioned several times over the last few quarters, it has always been my intention to return to retirement at some point in the future.

At our Board of Directors meeting last week, the F5 Board agreed that the time was right to initiate a formal search for my successor, when I retire as CEO of the Company.

We have set up a formal search committee to run this process and to vet potential candidates.

We have no specific time targets in place, but expect that this process may take six months or more to complete.

Needless to say, I remain totally committed to the overall success of F5, including our number one objective of returning to product revenue growth.

I continue to believe that F5 is in a really strong position to take advantage industry trends and customer requirements, and I want to reiterate my comments from last quarter.

Throughout FY16, our absolute focus is on execution, with the primary goal of delivering product revenue growth, and I believe this goal will be achieved as we deliver new product business drivers to the market.

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

And with that, we will now hand the call over for Q&A.

Rod Hall, JPMorgan.

This is Arkay on behalf of Rod.

Thanks for taking my question.

Could you expand some more on your commentary on the macro and enterprise spending, and on what you are seeing in the US and globally, and maybe talk about linearity you saw through the quarter?

In terms of the comments I made on the macro, it's really straightforward, nothing in depth in terms of what I was coming to.

You've got things like Brexit happening over in the UK, you have got all of the weird stuff that's happening worldwide in places like Turkey.

Frankly, although results seem to be going well this quarter, we're happy with ours, they're still low percentage versus what the used to be five or six years ago.

It's really that.

I think just given that scenario we feel that we should be reasonably cautious, when we look at the forecast that we get from our sales organization, and how we think the business is going.

In terms of the linearity, it was pretty smooth.

Really, no surprises.

We didn't see any -- it was really normal linearity, which for us, we like that a lot.

And that was almost on a weekly basis, as well, right throughout the quarter.

Okay, thanks.

And could you also comment on the rumor of any interest by Thoma Bravo to acquire your Company, and whether you'd be interested in a bid?

I'm glad you were the first one to ask, because you're first on the call.

I think you're going to know the answer to this question.

We do not comment whatsoever on any rumors, or anything like that.

That will be the same right throughout the call.

Okay, thanks.

Alex Henderson, Needham.

I was hoping you could give me just a data point.

What was the exact ending share count, and while you're looking that up, I was hoping to ask a question.

The product refresh timing is a little unusual, relative to your fiscal year-end.

Normally, you have a seasonally softer first quarter fiscal, which is the December quarter.

Would you think that given the product refresh, that would give you a little bit more heft sequentially into that December quarter?

I know you don't want to forecast more than one quarter at a time, but generally speaking, would you expect that to be a little bit more sequential heft into the first quarter, or should we just use the standard seasonality parameters?

It's really too soon to answer that second question.

Alex, this is John.

Obviously, we feel good about the refresh, and we feel good at the opportunity, but we've not seen enough data yet on that, to either be negative or positive.

And as you mentioned, we don't tend to forecast outside the quarter, so I'm going to pass on that one.

Let me ask another one then.

Can you give us some clarity on the financial vertical?

I know you stopped breaking it out, but obviously been a lot of contusions to the finance vertical, particularly in Europe, but also in the US.

Can you give us any sense of what's going on in that vertical?

Just in terms of our execution there, I'd say is pretty consistent.

As you said, we don't break it out anymore, but I wouldn't highlight anything.

This is John.

We haven't seen any major shifts of any significance in the verticals.

Okay, just the share count then.

Thanks.

Yes, so the ending share count was 66.2 million.

Thank you.

Brian White, Drexel.

John, you said the service provider spending in the US was a little soft in the June quarter.

Do you expect that to come back in the September quarter, and if you could talk a little bit about NFV, what F5 is doing in that market, the trends that you're seeing, as it's starting to take off?

That would be great, thank you.

In terms of looking at next quarter, first of all, I'm going to make an obvious statement, and the telco market tends to be lumpy, and I think that's always going to be the case.

And with our telco business in particular, it's mostly project-driven as well, which goes in line with that lumpiness.

And obviously, we're hoping that the 100-gig has an impact and that's why we called that out.

But we are not -- we don't forecast by vertical, so I'm not going to say anything about what we expect next quarter, but it's still going to be an important vertical for us with 100-gig.

In terms of NFV, I think we're in a really good position for NFV.

Everything that -- NFV by definition is obviously software biased completely.

And all our products, all our solutions can be delivered in a software-only way, and as you heard, the other thing we're doing is massive work on orchestration and management, and that's also critical in an NFV space.

And then Karl, you might want to talk about the performance of the TMOS VE that we're looking at, as well.

Right.

Just a few comments, Brian.

One, just to go back on orchestration and management, we are also big contributors on OpenStack, which is a big driver for these NFV-based applications.

And we see traction in NFV across our entire product line; they're adopting all the different modules as part of that, in these software environments.

In terms of performance, we did demonstrate at Mobile World Congress in Barcelona last February, and we are doing this with Intel, essentially a very early prototype version of what will become 100-gig version of our Virtual Edition software.

But in the interim, we'll be releasing, towards the end of the year, a 40-gig equivalent version of that.

We are moving on to the much higher performance, and in our internal testing right now, we're achieving really good results, with the performance.

in some and we expect by the end of the year to be shipping that.

And we have seen $1 million-plus project wins that are NFV-based.

Thank you.

Alex Kurtz, Pacific Crest.

John, how would you characterize the larger transactions over the last couple quarters, and especially in June here, across the different verticals?

And the deals that are including more security, at the higher end, above a couple million dollars?

To do it by actual function is a little bit different, I haven't got that on the top of my head.

But generally, we look at this fiscal, we saw pretty good growth in the $1 million-plus transactions in Q1 and Q2.

To be frank, that actually fell off a little bit in Q3, and we're still happy with the result, but we didn't see quite as many.

S so hopefully we'll see that return in Q4.

Thanks.

Erik Suppiger, JMP.

So you mentioned that Brexit appeared to have some impact.

I'm just curious, there's been some differences in the way some of the vendors have seen that, the impact from that.

In some cases, there's been business actually pulled into the June quarter in light of currency concerns for future quarters.

Can you just give us a little bit of some color around how that played out at the end of the quarter, and how that was negative on your results?

It's always really difficult to point to Brexit, and say that's why we had a certain result in the UK in particular.

And let me, before I go more into the question, just to reiterate that EMEA, I mentioned that EMEA sales were down year-over-year and they had a great track record up until that, but that was EMEA, UK actually was down fairly significantly.

We think that's probably Brexit-related, but remember by Brexit-related that could be currency-related, it could be a number of things.

We did have one example, and it's only one that I know of, of a customer actually placing a purchase order, halving the purchase order, and then deciding that they wanted to take it back completely.

That was all June.

We didn't ship it or take revenue on it or anything like that.

It was just a purchase order.

I'm not implying we extrapolate across the whole of that UK market, but that did happen.

So we think there was some impact, and time will tell now, as you look forward to this quarter as well, that was just a sudden impact, given the result, or it's going to be a longer impact.

It is something you need to take into consideration.

Thank you.

Rohit Chopra, Buckingham Research.

I just wanted to ask you a little bit about federal.

It was down sequentially.

Last year same period, it was up.

Just wanted to see if there's anything there, maybe more competition?

Spending seems to be roughly the same over there.

And maybe you could talk a bit about competition if you don't mind, just what's happening in the space, and what you're seeing in both the ADC and also on the security side, with your new products coming out?

So on the federal space, really the most prominent quarter for us generally is the upcoming quarter, with federal.

Other than that, it can be lumpy, like telco, it just depends on when the projects fall, and we can recognize revenue.

So I wouldn't say there's anything to read into that movement, at all.

And on the competition, no big changes from last quarter or the quarter before.

Obviously, we are coming out with a lot of products that's going to make us more competitive, but in the ADC space, it remains mainly Citrix.

Don't see any change in win rate, hopefully we will with the Shuttle series in areas like that.

And then the security, it's a pretty broad competitive landscape, depending on what security solution we talk about.

If you look at the application side, which is our main focus in security, we got a lot of uniqueness there.

I wouldn't really call it anything, apart from specifically we're probably going to see more of the local and the SSL intercept space, because that's what we're bringing to market now, and we think we have got good differentiation.

But nothing, no big, no big eye-openers on the competitive front.

Thanks John, thanks Andy.

Simon Leopold, Raymond James.

I wanted to see if you could talk a little bit more about what's going on with the public and hybrid cloud.

It's my impression, the press release in your prepared comments, talked more about public cloud as an opportunity than you have in the past, and I imagine part of this is the introduction of the Shuttle series.

So two things I'm trying to understand.

One is, public cloud, a sense of how that percent of your business or the trends there, and then in terms of hybrid applications, how much of the sales are made to the public cloud versus the enterprise customer, if we could understand the mechanics of the hybrid transaction?

Thank you.

Right.

It's still a very small number.

We don't give an exact percent.

It's still a small number from a revenue perspective.

It is really is infancy in terms of opportunity.

However, we understand it's very real.

The reason you're hearing more about it is that we're doing good penetration with our security products APM and the WAF.

Our orchestration is becoming more important.

When we've seen pieces of application move from one -- from a customer, say to a public cloud, then as I mentioned, we're seeing things by programmability and iRules still being just as critical.

It's areas like that, but we're talking, we're still talking fairly small, really small numbers.

The other thing is that both in the hybrid Cloud and in the public Cloud environment, remember, we are focused on the Fortune 500 customers, we're in about 80% of the Fortune 500.

They're asking us to help them from an architecture in an implementation perspective, so that gives us an advantage in that area, as well.

And the mechanics of the transaction, is it generally to the enterprise customer, rather than the public cloud entity?

There's more than one road to market.

Most of what I was just describing there was involving the enterprise customer, but we also have our products available on the public clouds that can be rented, purchased, again, that small numbers, it's fast-growing, but very small numbers.

But that's also important to us, and it will get more important over the next few years.

And the Shuttle series is an enabler for more of this, is my understanding?

This is Karl.

The Shuttle series is designed with future proofing in mind, to support these cloud-based applications, in the hybrid, specifically to be able to connect seamlessly between private traditional data center and cloud-based applications.

And we do that obviously through all the programmability that we provide, but also we have specialized programmable hardware that allows us to effectively create these connections, and essentially optimize these connections between the private and public and the data center.

Great, thanks for the additional detail.

James Suva, Citigroup.

We lost this question.

Simona Jankowski, Goldman Sachs.

This is Balaji on behalf of Simona.

I wanted to touch on the standalone security products that you recently introduced.

I know it's early days, but what interest are you seeing there?

And then maybe even what the rationale was for introducing standalone products now, since you haven't done this in the past?

There's a few reasons for us to go off and drive towards this, and one was that we wanted to -- today, essentially we have an ADC platform that provides best of breed security, especially application security, identity access management, but it doesn't necessarily lend itself well to going and targeting specific areas within the security buying centers.

And what we wanted to do was create a differentiated offering that allowed us to go out and drive essentially toward these -- to better position ourselves with the security buying centers in the enterprises, cloud, et cetera.

So we picked essentially functions, if you will, or products that our field had been asking us for, to differentiate, and we thought that there was a broad -- that there would be broad adoption of.

And one of the ones we picked, that we went after first, DDoS.

We have a best-of-breed solution there, we do things both at layer four, network-based, biometric style attacks, and we also do things at the application layer.

It's very differentiated that we tied these together seamlessly.

Another big area has been SSL intercept, and as John mentioned in his script, we have had customers that can implement certain parts of this functionality natively on our ADC platforms, but it requires a lot of programming of iRules, things like that, to actually get that to work.

So what we wanted to do was package that, make it easy to deploy and use, and have differentiation specifically for that, and then charge separately for that.

And the same thing with the carrier-grade firewall that we had announced.

And this is just a first start of a line of products, we'll have other ones that we produce, as time goes on.

As part of this, we have a whole laundry list of things, and we'll have specific platforms and branding and everything else that will go out as part of that.

You'll see that announced later this year.

And in terms of customer interest, are you already in discussions?

Yes, definitely.

There's a lot of momentum as we go -- especially on the SSLi side, but we have definitely been in discussions with customers for quite some time, and working with the field to push it along.

Great.

I just had one more clarification.

You cited weak telco spending in America, but the overall telco revenues, based on your 27% comment, it looks like it grew 8% year on year.

So where were you seeing strength, and what's the difference in those markets from Americas right now?

First of all, I don't think there's much difference in the markets.

Remember, I said, a lot of it's project driven, it tends to be that.

APAC was very strong, we had a good quarter in Japan as well, and EMEA, had growth, which was reasonable.

Great, thank you.

Sam, John Eldridge.

We're going to take two more calls.

James Faucette, Morgan Stanley.

I had a quick follow-up on the Japan commentary, and that was, did you have any benefit in the quarter from just a strengthening of the yen, or did deal sizes remain largely unchanged when everything was priced in US dollars?

Just that clarification.

And then my second question is, when we look at -- sorry, when we look at the telco projects, this is a follow-up there as well, and you mentioned that they're project-based.

Is that lumpiness that we're seeing right now because the projects are complete, or are we just in a pause ahead of acceptances?

Thank you very much

In terms of Japan, we didn't hear really anything from the Japan sales team that currency played a role in their results.

We think and believe that sales execution is good there, and they are continuing to drive the business very well.

But no discussion with them around currency.

And on the service provider question, no.

If you look at especially Tier 1s, as I mentioned, we -- when Gi firewall project, we're just touching the initial stages of that opportunity.

If you look at traffic seeding, traffic is increasing 50% a year still.

So no, then there's no concept of the completeness, it's more about when you move onto stage B or stage C, or do you have a completely new project like VoLTE, that type of thing.

Okay, that's helpful.

Thanks.

Jayson Noland, Robert Baird.

I wanted to touch on the software topic.

John, I think you said 38% of product revenue was software on the quarter, that's up from about a third quarter on quarter, which is a big move, and I assume it's a lot year on year, too.

The press release says it's a 4X performance improvement in Virtual Editions to be released in the December quarter.

So how do you get a 4X performance improvement, and what's the percent mix look near to medium-term, with software?

This is Karl, I'll take that question.

On the 4X, it's a lot of really good engineering.

No, we've done a lot of work on the guts of our system to -- and our software, to really enable ourselves to run at these higher performance rates.

And so we've been working on this for quite some time.

Like I said earlier in the call, we demoed with Intel, on some of their newer CPUs, essentially an early version of our 100-gig VE that will be coming out.

So when we talk about 100-gig, obviously, in terms of throughput and performance, we put some bounds essentially on what functions are actually running on that.

We are not going to run a database at 100-gig on the thing, but we are running traffic, and a lot of our major functionality at that performance level.

And the percent mix near medium-term, does that 38% continue to head north?

We will see.

We'll see.

We're about to introduce the Shuttle series, and that actually could change that percentage.

We'll see, that's going to be our goal.

One of the things I have mentioned a number of times is that we have a large installed base.

I mentioned this in a couple of the conference calls.

We have a large installed base of products that are under contract and more than five years old.

And for example, greater than five years old, we have 42,000 systems that are greater than five years old.

To put that in perspective, when we did the last product refresh, we had 25,000 that were more than five years old, so we think that's an opportunity.

And that could affect that percentage one way or the other, but the whole goal is to be successful in software, and to drive the Shuttle series as much as possible.

Thanks, John

All right, thank you very much for joining us for today's call.

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

206-272-6571.

Thank you.

Thank you, speakers, and this does conclude today's conference.

Thank you for joining.

All parties may disconnect at this time.