F5 Inc (FFIV) 2017 Q1 法說會逐字稿

Good afternoon and welcome to the F5 Networks first-quarter and fiscal 2017 financial results conference call.

(Operator Instructions).

Also, today's conference is being recorded.

(Operator Instructions).

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

Sir, you may begin.

Thank you, Sam, and thanks to all of you out there for joining us for today's call for the first quarter of fiscal 2017.

John McAdam, President and CEO of F5, 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 questions after the call is over, 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In addition, you can access an archived version of today's call live webcast from the events calendar page of our website through April 26 from 4:30 PM today until midnight Pacific time January 26.

You can also listen to a telephone replay at (866) 479-8682 or (203) 369-1542.

In 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 on 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.

And now, I'd like to turn the call over to Andy Reinland.

Thank you, John.

F5 delivered solid results in the first quarter of fiscal 2017, setting the stage for sequential and year-over-year growth through the remainder of the fiscal year.

Revenue of $516 million was within our guided range of $510 million to $520 million and up 5% from the first quarter of fiscal 2016.

GAAP EPS of $1.44 per share exceeded our guidance of $1.40 to $1.43.

Non-GAAP EPS of $1.98 per share also exceeded our guidance of $1.92 to $1.95.

Product revenue of $239.5 million in the first quarter was up 2% year over year and accounted for 46% of total revenue.

Service revenue of $276.5 million grew 8.5% year over year and represented 54% of total revenue.

Accounting for 56% of the total, revenue from the Americas was up 7% from the first quarter of fiscal 2016.

EMEA, which represented 25% of revenue, grew 2% from the first quarter of last year.

APAC accounted for 14% of revenue and grew 4% year over year, and Japan revenue, representing 5% of the total, grew 9% from a year ago.

Sales to enterprise customers represented 65% of total sales during the quarter.

Service providers accounted for 21% and government sales were 15%, including 5% of total sales from US federal.

In Q1, we had four greater than 10% distributors -- Westcon, which represented 18.8% of total revenue; Ingram Micro, which accounted for 16%; Avnet, representing 12.3%; and Arrow, which accounted for 10.1%.

Our GAAP gross margin in Q1 was 83.5%.

Our non-GAAP gross margin was 85%.

GAAP operating expenses of $293.2 million were within our target range of $285 million to $294 million.

Non-GAAP operating expenses were $251.2 million.

GAAP operating margin was 26.6%.

Our non-GAAP operating margin was 36.3%.

Our GAAP effective tax rate for Q1 was 32.7%.

Our non-GAAP effective tax rate was 31.5%.

Turning to the balance sheet, cash flow from operations was $189.3 million.

In Q1, we repurchased approximately 1.06 million shares of our common stock at an average price of $142.11, for a total of $150 million.

$624 million remains authorized under the current share repurchase program.

We ended the quarter with approximately $1.2 billion in cash and investments.

DSO at the end of Q1 was 55 days.

Inventories were $33.7 million.

Capital expenditures for the quarter were $14.1 million.

Deferred revenue increased 9% year over year to $914.2 million.

We ended the quarter with approximately 4,460 employees, an increase of 65 from the prior quarter.

Moving on to our outlook for the current quarter, as we discussed at our analyst investor meeting in November, Q2 will be the first quarter in which our BIG-IP iSeries appliance family ships for the entire quarter.

Initial uptake of iSeries in Q1 was solid and more than met our expectations, and we expect to see that trend continue in the current quarter.

We also saw strong business for our 100-gig blade across service providers.

In addition, we will be launching two standalone security products, DDoS Hybrid Defender and SSL Orchestrator on our Herculon platform, purpose built to simplify the deployment and enhance the performance of these services.

We will also begin shipping the new 40-gig versions of our software-only virtual edition products, which quadrupled the performance of the prior versions.

Early demand trends for these new products is robust and, as a result, we anticipate continued product revenue growth.

Although we expect to see some continued slowing in our service revenue growth in the short term related to the product revenue deceleration we saw in fiscal 2016, with continued product revenue growth acceleration we would expect this trend to begin to normalize over the back half of the year.

With this in mind, for the second quarter our revenue target is $518 million to $528 million.

GAAP gross margin is anticipated at or around 83%, including approximately $5 million of stock-based compensation expense and $2.6 million in amortization of purchased intangible assets.

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

For Q2, we anticipate GAAP operating expenses in the range of $290 million to $300 million, including approximately $39 million of stock-based compensation expense and $0.7 million in amortization of purchased intangible assets.

We are forecasting a GAAP effective tax rate of 34% and a non-GAAP effective tax rate of 32%.

Our GAAP EPS target is $1.41 to $1.44 per share.

Our non-GAAP EPS target is $1.95 to $1.98.

We plan to increase our headcount by 60 to 80 employees in the current quarter and we believe our cash flow from operations will exceed $170 million.

As a reminder, this amount reflects 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.

I was very pleased with the F5 team's performance in their first quarter of fiscal 2017.

We delivered year-over-year revenue growth of 5%, with strong profitability and operating margins.

The highlight of the quarter was a return to product revenue growth, which will remain our number one financial priority throughout fiscal 2017.

We continued to make good progress on sales execution, fueled by the vast array of new products that we introduced in the second half of fiscal 2016 and the first quarter of fiscal 2017.

Product sales in our Americas region continued to improve, with another quarter of year-over-year sales product growth.

Product sales in our APAC region were once again up year-over-year and the star of the quarter was our Japan region, with a very solid year-over-year increase.

Product sales bookings in EMEA, however, were again down year over year, driven by weak sales in the UK and Germany.

Software revenues were very solid in fiscal Q1, driven by strong growth in virtual edition software sales and strong growth in security solutions.

If we maintain our current growth momentum, we should exit fiscal 2017 on a $400 million annual trajectory for software sales.

In security, we saw a sharp rise in the number of SSL Intercept project wins, as well as some large multimillion-dollar GI firewall competitive displacements in the service provider market.

These trends resulted in double-digit year-over-year Q1 growth rates within our security product portfolio.

We had some excellent sales wins in our service provider business last quarter, with several significant NFV/GI-line, IoT, and large firewall security wins.

We also saw solid demand for our 100-gig blade sales in Q1.

The 100-gig blade product is proving to be very popular with customers that require massive scalability.

Once again, our services business delivered strong results and excellent profitability, with year-over-year revenue growth of 8.5%.

As Andy mentioned, we are seeing as expected slowing year-over-year services revenue growth related to the slower product sales in FY16.

We expect our services revenue growth plans to begin to normalize in the second half of the year as product revenue continues to grow.

In mid-November, we announced the second phase of the iSeries product range of appliances, known internally as the Shuttle series.

The initial customer reaction to the announcement has been excellent and sales in Q1 have exceeded our expectations.

Initial sales of the new iSeries products are tracking slightly above the trends we have seen in previous product refresh scenarios, and we believe this bodes well for fiscal 2017.

Last quarter, we talked about several emerging market conditions that have increased the appeal of our products with service providers and enterprise customers.

We gave examples of new opportunities, including the explosion of SSL-encrypted traffic and the need to intercept, inspect, and orchestrate encrypted traffic at speeds and volumes never before required.

We also spoke about customers' emerging desire to have consistent security policies across traditional on-premise data centers, as well as private and public clouds, as the movement of application workloads to cloud architectures accelerates.

We experienced many project wins last quarter, which reinforced our view of these expanding opportunities.

For example, a Fortune 100 insurance company leveraged the new F5 iSeries 5800 platform to deploy the next-generation private cloud infrastructure.

This implementation allowed them to instantly orchestrate provision and dismantle ADC resources in concert with their existing Cisco infrastructure.

This customer also deployed F5's ASM product, ensuring that common WAF functionality was available to on-premise applications, as well as their private cloud data center assets.

A Fortune 500 discount retailer with a large online and mobile clientele required an improved security perimeter for its online Web presence.

They also require that solution to deal with the onslaught of encrypted ECC traffic triggered by the recent adoption of this encryption method by companies like Apple, Google, and Microsoft.

This customer deployed six VIPRION chassis in combination with a silver line deployment in this WAF, anti-DDoS, and encrypted traffic management solution.

In a $5 million plus transaction, a large Asia-Pacific telco operator initiated a five-year program to virtualize 100% of its IP transport network and chose F5 as its primary ADC provider.

This deployment leveraged many cloud-based orchestration and automation technologies, including OpenStack and KVM.

The solution consisted of F5 virtualization software licenses, as well as our carrier-class firewall, our WAF, and access management software modules.

We will be demonstrating this solution, as well as many others, at Mobile World Congress next month in Barcelona.

We are continuing to experience momentum in our customers' effort to lift and shift from traditional on-premises to private and public cloud environments.

This past quarter, one of our long-time North American customers, a leading learning management system provider, began such a transformation.

Working together with AWS, F5 crafted a dynamic and secure traffic management solution utilizing F5's WAF and firewall capabilities in the AWS computing environment.

This enabled our customer to easily repurpose many of their legacy data center applications to the public cloud without compromising the mature security capabilities they enjoy with F5.

In recent quarters, we have seen growing interest in our Internet of things capabilities and have enjoyed successes with several Fortune 500 customers.

In Q1, one of the largest global manufacturers of home appliances invested in F5's VIPRION platform to help facilitate machine-to-machine communications within their massive base of installed products.

The F5 solution leveraged a full stack of traffic management and security offerings, including dynamic service chains and a highly scalable SSL deployment.

F5's leadership and scalability, programmability, and diverse protocol support is ideal for managing complex IoT requirements.

From a product roadmap perspective, you should expect to see F5 continue to introduce several exciting new products through fiscal 2017.

Today, we announced the addition of several new offerings to our security portfolio.

The new Herculon product family, with purpose-built hardware and a simplified user experience, lets security administrators quickly deploy solutions that overcome specific application security obstacles and threats.

Herculon products provide improved visibility and control over application behavior and solve difficult industry challenges in a straightforward, easy-to-deploy manner.

The first two offers available in the Herculon portfolio are the Herculon SSL Orchestrator and the Herculon DDoS Defender.

The Herculon SSL Orchestrator provides improved insight for customers experiencing growth in the volume of encrypted application data.

Today, most Web traffic is now encrypted and attempts to address application security using traditional methods alone are both inadequate and costly.

The Herculon SSL Orchestrator provides leading cryptographic capabilities, context aware dynamic chaining -- service chaining, and native third-party integrations.

Herculon SSL Orchestrator can significantly increase performance while significantly decreasing infrastructure costs by eliminating the need for redundant encryption and decryption capabilities.

The Herculon DDoS Hybrid Defender offers customers an unparalleled multilayered defense against volumetric and pervasive DDoS attacks.

This is accomplished by developing high-performance hardware on-site and enriching its capabilities with intelligence gathered from our cloud-based Silverline scrubbing centers.

This hybrid approach improves time to mitigation in scenarios where Website and application availability are crucial to customer interactions.

The product provides comprehensive DDoS coverage through behavioral analytics, subsecond attack mitigation, and visibility into sophisticated application-layer attacks.

Also announced today is our Silverline WAF Express service.

As more and more of our customers prefer a Web application security as a service approach to attack mitigation, we are introducing a preconfigured offering that leverages our cloud-based Silverline platform.

By their very nature, WAF deployments can be complicated.

With WAF Express, customers can protect applications with a point-and-click simplicity while our security operations center experts monitor, analyze, and mitigate attacks as they occur.

We also announced today that we have added security and incident response team services for all F5 customers to help them more quickly identify and neutralize threats and to help protect their critical business operations.

We plan to ship TMOS 13.0, known internally as the Daytona release, in this current quarter.

Daytona is a major release with a host of new functionality, including our high-performance 40-gig virtualization; a sophisticated but easy to install iApp for our SSL Orchestrator; VCMP support for the 100-gig blade, which should extend the 100-gig blade solutions to enterprise customers; and IoT/MQTT protocol support.

We also plan to deliver our unique application connector solution in Q2.

Our application connector enables customer applications to seamlessly access multiple public cloud infrastructure directly from private clouds in on-premise and/or co-lo data centers.

This provides a truly flexible and elastic hybrid cloud solution to our customers.

Finally, we are planning to deliver the first release of our container micro services based solution, internally known as Project Velcro.

Velcro includes two products that work together, the container connector and the application services process.

We have been beta testing Velcro in several micro services environments and we are excited by early indications that it will enable an entirely new category of F5 solutions with our new application services [proxy].

We believe this product will play a pivotal role in accelerating our customers' ability to adopt emerging [mode two] and container-based architectures in both private and public cloud environments.

As far as the fiscal Q2 outlook is concerned, Andy outlined our guidance for the current quarter.

We have made good progress in all our key strategic initiatives.

The vast array of new products delivered in the second half of fiscal 2016, combined with the exciting roadmap of additional products planned for this quarter, should drive solid business for F5 during the year.

I believe we are poised to see increased growth in year-over-year product revenue in Q2 and we have every opportunity to build in that momentum for the second half of fiscal 2017.

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

(Operator Instructions).

Ittai Kidron, Oppenheimer.

Thanks, a couple of questions from me.

First, Andy, just to clarify your commentary on the service slowdown and your expectation to normalize.

Does normalize mean stable or go back to double-digit year-over-year growth?

I just want to make sure I get this right.

So historically when we've talked about it, we've talked about services following product, but in an more elongated fashion, and so I think when we say normalized, we are going to see that kind of shallow out through the year with the product revenue growth, and then that product revenue growth will start to pull it up as we continue executing.

So at some point, the product growth -- so I guess the services revenue growth should kind of stabilize at a certain figure, and you would expect the product revenue growth to eclipse that of services somewhere in this fiscal year?

Well, you're kind of putting words in my mouth (multiple speakers)

I just want to make sure I'm interpreting -- when you said pull it higher, it implied it needs to be higher than services, yes?

We said we expect it to continue -- services revenue to slow again this quarter, and then with product revenue growth, we'll see it normalize and then start to pull up.

So you can interpret that how you like.

Okay, very good.

And John, regarding the business, I'm looking at the different parts of your business.

It looks like the only part that was really down on a year-over-year basis was service provider.

So, A, did it deliver to your expectations?

Was there any lumpiness in there that made for that?

You sounded pretty confident about the list of opportunities you have growing there.

And then, second, maybe just from your experience from previous product cycles in the past, you've talked about how the iSeries so far is trending above your historical patterns, but maybe you can remind us how many quarters from introducing a new refresh in your portfolio you really kind of hit peak performance from a growth standpoint?

Okay.

On the first one, on service provider, actually I felt really good about service provider last quarter, especially in Americas.

We had a really, really solid performance there where we saw a lot of wins with the GI firewall replacing the existing -- and I'm talking multimillion-dollar type wins.

We saw across the board the 100-gig board had a real big jump up in terms of the number of cards shipped from the previous quarter, and then I talked about things like IoT where we think that's pretty good, and we're looking forward -- we are actually going to have quite an exciting event at Mobile World Congress, showing a lot of customer-type solutions and partner solutions.

EMEA did have a tough-ish quarter in service provider and that went hand-in-hand, quite frankly, with the overall toughness we've seen, but I was pretty happy with the results.

In terms of the product refresh, I think I caught the question, but if I didn't, Andy will correct me.

But as we've said in the past, we tend to see in the first few quarter of shipping, 25% of those -- that product type to be the new product.

This is looking very good for that to happen.

As we said in the script, we're very, very happy with the way that -- the reception from customers, A, from the ones that we announced towards the end of Q4, and then for the ones that we announced at the end of Q1.

We even saw quite a strong pickup towards the end of December across the board, and I know that the field are quite excited about it.

Very good.

Good luck, guys.

Jess Lubert, Wells Fargo Securities.

Hi, guys.

Thanks for taking my question and congrats on getting product growth back into positive territory.

I also have two questions.

First, maybe just following up on Ittai's, I was hoping you could touch on linearity and to what extent the business strengthened as customer awareness of the new products built and how you are feeling about pipeline deal sizes, product momentum early here in the March period.

And then, the second question, you mentioned you expect to achieve a $400 million annual software run rate by the end of the year, so I was hoping you might be able to help us understand where you are relative to that level now.

What drives the improvement, so we can kind of get a sense of what that could potentially mean for the model?

Let me go with the software, first of all.

I mean, we've talked in the past quarters about the percentage of product revenue being something like 37%.

I think we've sometimes said 38%.

And if you do the math in that, you can see I'm probably being relatively conservative in the $400 million number because that's typically in the 90s.

So that was really just a measure to give everybody a feel for how much software we're actually doing.

The first question?

When you asked questions about deal sizes and what we're seeing there (multiple speakers)

Linearity, yes.

The linearity last quarter was interesting.

If you look at it at face value, it was fairly normal; however, what we did see was a little bit of a lull in the middle of the quarter, round about the announcement -- before the announcement of the new VIPRION products.

I don't know if that was a slight amount of [Osborne] or not, who knows.

But we saw that picking up to normality, so no real big -- not much to talk about there.

And then on deal sizes, Jess, we've been in this range between $110 million and $120 million for -- at least through fiscal 2016 and now, and that continued.

We were at the low end, though, at right around $110 million, but I think worth highlighting that we saw this quarter was the strength in our large deals was up.

We've talked a lot in the past that we watch large deals in particular just to measure how we feel about the macro, and we felt really good about how many million-dollar plus and even $500 million to $1 million deals, it was a strong outcome there.

And then when we look at the pipeline, we think we're going to see much of the same as well.

Thanks, guys.

Mike Genovese, MKM Partners.

Great.

Thanks very much.

I have a question about -- kind of a higher-level question which related to dev ops, because while you didn't talk about it today I've heard you talk about dev ops as a business driver in the past, and I'm somewhat struggling to understand that because it seems to me that if developers in the enterprise need to be responsible for how the applications run on the network that that would actually take away some of your opportunity that you may have had before.

So does that question makes sense to you where you could cut me straight on that or give me any color on whether dev ops is actually a driver or an inhibitor for what you guys do, I would appreciate it.

Thank you.

Dev ops is -- in fact, when I -- this is John -- when I talked about some of the new products we're rolling out -- for example, a big one related to dev ops is the Velcro.

That's the internal name of our product, and that's the micro services version of our ADC and Watson container architecture type scenarios.

That's really, really aimed at the dev op community, and I mentioned about the fact we've got a bunch of beta tests going on there, so we think that's an opportunity moving forward to not only get the mindset of the dev op community, but also to be able to drag a lot of our other products along with it, software module security solutions, et cetera.

And then, also in the past we've talked about what we've been doing with iRules, with iRules LX, and with iApp LX.

That, again, is very aimed at the dev ops community.

In fact, we've effectively -- the programmability is right in their center of excellence in terms of the way they want to do that, so that builds more and more solutions on the F5 platform.

So, long story short, I think we do see dev ops as an opportunity.

Do you want to say anything, Ryan?

This is Ryan, so I just thought I'd mention dev ops is something that drives our roadmaps and is a big focus area for F5 and our technology, and the ability to support automated -- automation and orchestration ecosystems with open APIs and very flexible extendability of the product and simplicity and usability are critical things.

And that includes new technologies, just like John said.

Our container connectors and our support of micro services, which we're launching this quarter, are pretty big focus areas and things where we are really going to be enabling many more kind of dev ops architectures and environments than we have in the past.

Great.

I appreciate that.

Maybe I'll just ask one other question and then pass it on, but just, John, can you give us your most recent thoughts on how long you may want to work before we see you retire again?

Just any thoughts there, I would appreciate that.

I bet there is a lot of people smiling at that one.

Everybody seems to smile when we talk about retire again.

Just to give you an update on that, I mean, I'm not going to go into much detail here because obviously the [saps] process is the responsibility of the Board and the [sales] committee are involved in it, but it's their responsibility.

But the process is actually progressing really well.

Obviously, we'll let you know ASAP when we've got something to announce.

But meanwhile, my focus by a mile is focusing on the business and delivering another quarter this quarter, another good quarter.

Thanks again.

Mark Kelleher, D.A. Davidson.

Great.

Thanks for taking the questions.

I was wondering if you might talk about a little bit about the Silverline products.

You mentioned that in your script.

How's that progressing?

Is there a trend now towards cloud deployments?

How does that figure in the competitive environment?

Maybe give an update on how the competitive environment is on both security and the ADC side.

So this is Julian.

We saw a good quarter last quarter with good growth.

We saw deals all over the globe, so we're pleased with that.

We saw one good, large deal in North America.

We released -- so we've been offering anti-DDoS and our WAF service now for about nine months.

We released, as John said in his script, a WAF Express because we felt that would be more competitive with some of the other vendors out there.

We released that right at the end of the quarter and we took our first deal right in the last week of the quarter as well, so the competitive nature of us would like to see more, but we're seeing good growth so far.

Thanks, Julian.

And the last thing about Silverline, in case you missed it in the script, was what we're very much using Silverline as a competitive advantage not just against cloud-based solutions and as a service solution, but also by integrating it with our firewall and our WAF capability and then [shading] intelligence.

We think that's a massive differentiator for us because of our installed on-premise base, installed base so big we can get more and more intelligence for the cloud-based solution.

Is there a way to size the cloud-based solution as a percent of revenue?

It's still quite small, but growing.

I can give you very big growth numbers, but that would be -- it's still quite small.

And I think what we've said, and we're sticking to this, is as it gets bigger, the deferred revenue in particular from a subscription point of view, we'll start talking about it.

Okay.

Great.

Thanks.

Jason Ader, William Blair.

Thank you.

John, I wanted to ask you just on the product cycle.

I know we're in a very different world today with the cloud, et cetera, and some of the secular evolution in your market.

How do you think about this product cycle relative to the previous cycle in that context?

I'm going to give you an answer.

It's a little bit dangerous because as an assumption you can't take this to the bank; however, everything we're seeing right now is telling us this is going to be a very, very similar product cycle to the previous ones.

We're seeing excitement in the customer base.

We're seeing quick take-up of the new products.

We think we are going to be very, very similar from a percentage point of view that I mentioned in terms of this coming quarter versus the previous ones.

So we'll see, but so far, so good.

You mentioned in the first full quarter usually you are at 25% of product revenue from the new product, but when do you get to sort of, let's say, more than half?

Is that (multiple speakers)

It typically -- I might be wrong here -- it typically starts at 25, gets up to about 80 by the end of a year.

By quarter four, a full shipment?

Yes.

Three, four quarters.

Thank you very much.

[Dev Clough], [Instinet].

Hi, gentlemen.

Thanks very much for taking the question.

I guess not to put too fine of a point on it, but it does seem as though we all had a couple million more in our expectations for the March quarter.

So it may well be that we as a group were too optimistic for March, but I also wanted to ask, is the iSeries being ahead of pace, does that mean that the older products are falling off a little faster than you had thought as well, so it's a bit of a wash?

Or is the iSeries incremental growth incremental to the growth of the whole company?

There's two things we're looking at, and I think hopefully taking a conservative view is that EMEA has seen a few tough quarters here, so until we're confident of success there, we're going to take a conservative stance on that.

Obviously we mentioned services, and until we start to see the product growth coming back -- there the main areas, but no -- in terms of looking alone at the product stream, when I look at what I'm very happy about, it's software sales, the VE sales, the cloud sales starting to rise with Amazon and Azure.

Security was double digit and we feel reasonably good about that.

But they were the two main areas that we took into account.

Okay, perfect.

Thank you.

And then, the UK and Germany weakness that you spoke about, do you think that is economic related or do you think other folks are seeing that, too, or is that specific to you folks at this point in time?

You know, I think, frankly, it's probably a combination of macro and we could probably improve execution in certain areas, probably both.

Okay.

Well, great.

Thank you very much.

Vijay Bhagavath, Deutsche Bank.

Thanks.

Good afternoon.

The question is on your iSeries product refresh cycle.

We hear a lot about it from clients.

I'd like to understand what's the legs or the time frame approximately of the product cycle?

Would it be a few quarters out?

Would it be a few years so that we get kind of an understanding of the time frame in terms of modeling?

And then, also, as your customers move to containerized applications, how [would] be your product refresh cycle when that customer moves to more of a container application framework?

Thank you.

On the new products, Vijay, I think, as John said, usually we see the uptake by the end of the year.

It's about 80% of our sales.

I think we've talked a lot over the last year that we see this as a driver of our business, so we're excited for that, and we're usually on about a three-year cycle for upgrading our hardware platforms and so I think you'll see us work against that kind of timeline again.

And then in terms of the micro services type opportunity, we see that as -- it's mostly going to be east/west type traffic.

It's going to be in container architecture.

We see that as an additional area to where we are today with our core business, which obviously is mostly north/south traffic, mostly application -- optimizing applications in that environment.

So, I don't think there's going to be a clash here.

I think it's more of an additional market type opportunity.

Perfect.

Thanks.

Matt Robison, Wunderlich.

Thanks for taking the question.

I was curious if you saw any particularly notable budget flush from your customers that may have had calendar-year seasonality?

And if you could -- given the events of the day, if you could maybe talk a little bit about how you guys interact, if it all, with application performance management and the analytics provided by it?

On budget -- budget flush is always a tough one to actually measure.

I did mention that we saw a little bit of a lull, which could have been linked to the iSeries announcement, and then we saw a strong close at the quarter and some of that can be budget flush, but I wouldn't say it was -- it wasn't incredibly significant.

I'm sure we saw some, but I wouldn't factor it as a big factor in the quarter.

And then, the second question?

Yes, it was a little more arcane, given the dynamics of (multiple speakers) Cisco, and just if there's any kind of -- if you guys are able to work with those kind of providers to kind of close the loop for application control, if that's part of your activity?

Yes, so just a couple quick comments on app dynamics themselves.

One thing I want to make just clear is we're definitely not a competitor.

Actually, application analytics companies in general, we actually -- are a significant amount of our partners, so the amount of analytics and metrics and visibility that our technologies and products have because they've stayed in that strategic kind of control point between clients and the applications is incredible.

We see a lot of the information about applications, and so we have a significant amount of technology and functionality that extends and feeds analytics applications externally.

Sam, we're going to take two more questions and then wrap it up.

James Faucette, Morgan Stanley.

Hi, this is Meta Marshall on for James.

A couple of questions.

First is just if you could speak to if there is a higher security attach rate on some of the refresh as you go forward with the iSeries.

Are you seeing higher take rates with some of the security products?

And then, second, you had mentioned in the past that some of the standalone security products would be targeting more security-specific resellers, and I just wanted to know what the progress on that was.

Thanks.

Okay.

On the first one, I did mention that we had a pretty solid quarter last quarter with the security software solutions, which obviously is attach rate as well.

In fact, I talked about double-digit growth, so we felt very, very good about that.

We expect iSeries definitely to give us more attach rate; the performance is designed to do that.

We've taken a number of restrictions, especially towards the bottom end of the product line that should help out as well, so generally we would expect that to be the case.

This is John DiLullo.

I can comment on some of that as well.

The restrictions that John talked about allow us to run more security modules on the lower-end products, so that's been very positive.

And then, that's also helped with our appeal to some of the emerging security partners that we're recruiting and developing, and we have a pretty aggressive enablement and campaign to make them even more capable with our products, which seems to be going very well.

Great.

Thank you.

Paul Silverstein, Cowen and Company.

I love being last.

Several questions, it's my mic, sit back.

First, Andy, just a clarification, can you repeat what the pro forma OpEx, the guidance is?

My apologies.

Yes.

It is --

I'll get that for you.

That, or I can get it off-line, my apologies.

While you are looking for that, John, I apologize.

I'm sure you were thrilled to get through this call without anybody asking you about what we ask you about every quarter in terms of the impact from public cloud, AWS, et cetera, so my apologies.

But I do want to ask you -- I assume there's no change, but I want to ask the question.

What, if anything, are you seeing?

We have become more and more positive, Paul, over the last year in particular in terms of the opportunity of the public cloud.

One of the things that has been becoming very obvious, too, is when our customers -- remember, we have a very, very large Fortune 500 customer base -- when our customers are doing lifts and shifts to the public cloud, whether Azure, whether it's Amazon, et cetera, that almost 100% of the time our products are going with that and that product being, it could be classic TMOS with programmability and iRules already included.

It could be additional products like the WAF for protection or firewall or access policy management.

And that's one of the reasons we've been giving a lot of customer examples on that basis.

So we're working in the field with the AWS folks in the field; we're doing the same with Microsoft.

We're viewing it as an opportunity, and in fact, I highlighted it as one of the three emerging opportunities that (multiple speakers)

I heard the prepared remarks, but, John, to be clear, you would argue that the net impact when we take into account the average size of the equation and then the positive side, SSL and the other security aspects, they didn't (inaudible) have positive impact.

Is that the bottom line?

Yes.

And also remember the studies we've done in terms of hybrid clouds, hybrid clouds is all over the place from the customer perspective.

I can't remember the exact percentage; I think it was in the 80 -- it's a very high percentage of the responses we got where the large customers that we sell to are going into hybrid cloud environment.

That gives us a massive opportunity, A, to make it happen and, B, to take advantage of it as we take our security and our mature products and make sure they are on the public side of that.

Two other quick questions, US Fed outlook, is it too early to talk about what the outlook is for the fiscal year for US Fed (multiple speakers)

It is, and it's usually September where we have a very strong -- what we'd say is we're very, very happy with the sales execution over the last couple of years in federal.

So we expect it to be strong, but this is far too early.

All right.

And I assume it would be a similar response, Andy, with respect to the extent that tax policy hasn't even been set yet in terms of both -- in terms of particularly with respect to incentivizing manufacturing in the US and penalizing manufacturing abroad.

So that said, we understand the tax policy hasn't been set, can you give us any insight in terms of prospectively what impact it could have?

How much manufacturing is done abroad versus US?

I know there's a heavy software element, but there is also a hardware element to your solutions.

If you look at how we bring our product together, there is some assembly overseas, but really all the software development is here in the US.

We load all the software onto our hardware platforms here in the US, so from what we've heard from the rhetoric and our look at it, we're not sure there would be that big of an impact to us, but we continue to listen and learn.

And then, the one -- I'll just end on this.

You challenged me with a little math there because of how I give you the information, but if I take OpEx and back out the stock-based comp that we talked about and the amortization of purchased intangible assets, it would be $250.3 million to $260.3 million of OpEx.

Got it.

I apologize.

Could I squeeze, I promise, one last one?

Is it possible to quantify the foreign currency impact to EMEA with respect to the UK and Germany, particularly EMEA in general, in terms of how much of an impact that had on revenue?

You know, we bill mainly in US dollars.

We've seen a little benefit from Brexit, frankly, on the OpEx side, but to quantify it looking forward, I think, is too difficult at this point.

Appreciate it.

Thanks, guys.

Thank you all for joining us and we hope you have a good quarter.

We hope we have a good quarter.

We'll talk to you next time.

Thanks.

Bye.

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

Thank you for joining.

All parties may disconnect at this time.