F5 Inc (FFIV) 0 Q0 法說會逐字稿

Good afternoon, and welcome to the F5 Networks fourth-quarter and fiscal 2012 results conference call.

At this time, all parties will be able to listen only until the question-and-answer portion.

Also, today's conference is being recorded.

If you have 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, Victor.

Welcome to all of you to our conference call for the fourth quarter and fiscal year 2012.

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

Other members of our executive 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In addition, you can access an archived version of today's live webcast from the Events Calendar page of our website through January 23.

From 4.30 PM today until 5.00 PM Pacific Time on October 25, you can also listen to a telephone replay at 888-568-0394 or 203-369-3916.

During today's call, our discussion will contain forward-looking statements, which include words such as believe, anticipate, expect, and target.

These forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these statements.

Factors that may affect our results are summarized in our quarterly release and described in detail in our SEC filings.

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

Before we begin the call, I want to remind you that we are holding our 2012 Analyst/Investor Meeting in New York on November 15.

If you are planning to attend the meeting and have not registered, we invite you to register online through the link on our IR Events Calendar entry for November 15.

We hope you can join us in New York for that event.

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

Thank you, John.

F5's fiscal 2012 was a year of solid execution in a difficult macroeconomic environment.

We were able to achieve 20% revenue growth, maintain world-class operating margins, and delivered record earnings and cash flow, while developing products and services that set the stage for several years of continued revenue growth.

Following discussion of results for the fourth quarter and for fiscal year 2012, we will provide guidance for Q1 2013 and outline our general planning assumptions and expectations for the year.

As a reminder, all non-GAAP numbers exclude stock-based compensation expense and amortization of purchased intangible assets.

A reconciliation of GAAP to non-GAAP results is included with our press release.

For the fourth quarter of 2012, revenue of $362.6 million was within our guided range of $360 million to $370 million, up 3% from the prior quarter and 15% from the fourth quarter a year ago.

Book to bill for the quarter was equal to 1. Q4 product revenue of $209.7 million, up 6% from the fourth quarter of last year, represented 58% of revenue.

Service revenue of $152.8 million increased 30% year over year and accounted for 42% of revenue.

Q4 revenue from our core application delivery networking business was $356.8 million, and revenue from our ARX file virtualization business was $5.8 million.

On a regional basis, the Americas grew 8% year over year and represented 56% of revenue; EMEA, representing 22% of overall revenue, grew 29%; APAC, at 15% of revenue, grew 31%; and Japan, 7% of revenue, grew 13% from a year ago.

By vertical, telco represented 19% of sales during the quarter; technology, 17%; and financial, 20%.

Total government was 17% of sales, including 10% from US Federal.

During Q4, we had two greater than 10% distributors -- Avnet Technologies, which accounted for 16.8% of total revenue; and Ingram Micro, which represented 12.8%.

Continuing down the income statement.

GAAP gross margin in Q4 was 82.7%.

Non-GAAP gross margin was 84%.

Operating expenses of $188 million were at the low end of our $188 million to $195 million guided range, and non-GAAP operating expenses were $164.6 million.

GAAP operating margin was 30.8%.

Our non-GAAP operating margin was 38.6%.

Other income for the quarter was $900,000.

The Company's GAAP and non-GAAP net income for the quarter reflect a higher-than-expected effective tax rate.

This resulted from a higher-than-expected impact of foreign permanent tax differences and a higher blended effective state tax rate, which increased our GAAP effective tax rate for the fourth quarter to 39.9%, above our expectation of 35.5%.

Our non-GAAP effective tax rate was 37%, above our 34% expectation.

These higher-than-anticipated tax rates had an impact of approximately $0.06 to GAAP EPS and $0.05 to non-GAAP EPS.

Reflecting the higher tax rate for the quarter, GAAP net income for Q4 was $67.7 million, or $0.85 per diluted share, below our guided range of $0.90 to $0.93.

Non-GAAP net income was $88.7 million, or $1.12 per diluted share, also below our guided range of $1.16 to $1.19.

Revenue for all fiscal 2012 was $1.38 billion, up 20% from fiscal 2011.

GAAP net income for fiscal 2012 was $275.2 million, or $3.45 per diluted share.

Non-GAAP net income was $348.6 million, or $4.37 per diluted share.

Turning to the balance sheet.

In Q4, we generated $148.6 million in cash flow from operations, which contributed to cash and investments totaling $1.19 billion at year end.

For all of fiscal 2012, cash flow from operations totaled $495 million.

DSO was 46 days.

Inventory at the end of the quarter was $17.4 million.

Deferred revenue increased 30% year over year to $447.3 million.

Capital expenditures for the fourth quarter were $11.3 million.

During the quarter, we added 125 employees, ending the year with approximately 3,030 full-time employees.

For the fiscal year, we added 540 employees, an increase of 22%.

In Q4, we repurchased approximately 514,000 shares of our common stock at an average price of $97.29 per share, for a total of $50 million.

Approximately $180 million remains authorized under the current share repurchase program.

Moving on to our guidance for Q1 and our fiscal-year '13 outlook, we are weighing a number of factors as we determine guidance for Q1 and assess our growth prospects for fiscal year '13.

As we have referenced several times over the year, we do anticipate typical fiscal Q1 seasonality.

We also recognize that our short-term visibility continues to be limited by the macroeconomic uncertainty, which caused many of our customers to slow or reduce spending in the second half of fiscal 2012, particularly in the case of larger, $1 million-plus type opportunities.

At the same time, we are anticipating a very positive reception to the new products and platforms that we will be introducing in fiscal 2013.

Throughout the year, we are rolling out a powerful lineup of new hardware platforms, software products, and significant performance increases to our virtual products that will drive new and increased growth for F5.

We also see momentum building in customer engagements for our Diameter signaling products from the Traffix acquisition and believe this will drive material revenue in fiscal year '13.

Lastly, we see a very real market share opportunity with the recent announcement from Cisco to cease development of its ACE product line, and we are being very aggressive in our efforts to capture this opportunity.

In consideration of these factors, for the first quarter of fiscal 2013, we are targeting revenue in a range of $363 million to $370 million.

We are forecasting GAAP gross margins to remain in the 83% range, including approximately $3 million of stock-based compensation expense and $1 million in amortization of purchased intangible assets.

We estimate GAAP operating expense of $193.5 million to $198.5 million, including approximately $25.5 million of stock-based compensation expense.

We anticipate a GAAP effective tax rate of 37% for the quarter, and a non-GAAP effective tax rate of 34.5%.

Our Q1 GAAP earnings target is $0.86 to $0.88 per share.

Our non-GAAP earnings target is $1.14 to $1.16 per share.

We expect DSO in the mid to high 40 day range.

We anticipate inventories in the range of $17 million to $19 million.

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

And, we believe we will generate cash flow from operations in excess of $145 million.

For fiscal 2013, our general planning assumptions and expectations are as follows.

We expect to see sequential revenue growth throughout the year, with more robust product growth in the back half of the year as demand builds related to our forthcoming product refresh and new security and service provider software modules.

We anticipate GAAP gross margins consistent with our Q1 guidance of 83%.

We are targeting non-GAAP operating margins for the year to be at or around 38%, with some seasonal fluctuation, as margins will be a bit lower in the first half and stronger in the second half.

We expect stock-based compensation expense to approximate Q1 levels until our next annual grant in August.

Capital expenditures are expected to be $6 million to $12 million per quarter, with some quarter-to-quarter variability related to investments.

Consistent with Q1, we expect our effective tax rates to average approximately 37% on a GAAP basis, and 34.5% on a non-GAAP basis throughout the year.

These tax assumptions do not assume a reinstatement of the R&D tax credit.

As John mentioned, we will be holding our Analyst/Investor Meeting at the Roosevelt Hotel in New York on November 15.

We look forward to seeing you there.

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

Thanks, Andy; and good afternoon, everyone.

I'll take a few minutes to discuss F5's performance in fiscal 2012, talk in more detail about our Q4 results, and then comment on our outlook and the exciting opportunities we see going into fiscal 2013.

I was very pleased with the F5 team's performance in fiscal 2012.

In spite of a difficult macroeconomic environment, especially in the second half of the year, we achieved year-over-year revenue growth of 20%, with world-class non-GAAP operating margins above 38%.

We accomplished this while investing significantly in additional headcount, increasing our total net headcount by 540 employees, ending the year with a total of 3,030 employees.

We exited fiscal 2012 with a stable balance sheet, with almost $1.2 billion in cash and investments and no debt, having purchased $185 million of our common stock during the year.

Sales of our VIPRION chassis-based products were particularly strong, with year-over-year growth of 107%, driven by strong adoption of the mid-range VIPRION 2400 system as well as sales of the high-end VIPRION systems into the service provider market.

In addition, our overall software sales increased by 58%, driven by a significant increase in software modular attach rates and strong growth in sales of the software-only versions of our product portfolio.

The growth in our software attach rate clearly benefits our business model and is also critical to our market-expansion strategy.

We have made tremendous progress in expanding our opportunities into key markets including security, service provider and cloud-based architectures.

In security, we now have the most comprehensive integrated solution in the industry that includes our application firewall, ASM, and our remote access solution, APM.

Software revenue from our security modules was approximately $55 million last year, up 90% from the previous year.

This is software-only revenue and doesn't include the service revenue, the associated BIG-IP or VIPRION hardware, incremental ADC revenue, or any of the revenue from the Data Center Firewall solution.

In the service provider market, our ability to deliver intelligent policy enforcement at world-class performance levels continues to be a key capability for managing the challenge of ever-expanding increase in mobile data.

Our high-end VIPRION platform, combined with the application fluency of TMOS and the flexibility of features like iRules, gives service providers a unique opportunity to build value-added services.

We also made good progress with sales of carrier-grade NAT, firewall, IPv6, and traffic steering solutions.

I'm also very pleased with the progress we are making with the acquisition of Traffix Systems that was completed mid-fiscal 2012.

The Traffix team is world class, and we are proud to have them as part of the F5 family.

As I mentioned last quarter, we believe the opportunity with the Traffix Diameter-based solutions will prove to be both significant and strategic to our overall service provider business.

The Traffix pipeline has been growing nicely, as service providers roll out their LTE architectures and adopt Diameter as the standard signaling protocol.

I'll talk more about this when I discuss our fiscal 2013 opportunities.

Our services business delivered strong performance consistently throughout fiscal 2012 and continued to be a significant profit and revenue growth contributor, while maintaining customer satisfaction at world-class levels.

The attach rate of service to product sales continues to improve, and we once again experienced excellent renewal rates.

We also continued to grow our consulting business, which increases customer satisfaction and drives additional product revenue.

As far as Q4 is concerned, I'm very pleased with our results.

We delivered 15% year-over-year growth in spite of a cautious spending environment.

From a geographic perspective, both EMEA and our Asia-Pacific regions had solid sales bookings growth.

In North America, we saw reasonable sales growth for orders up to $1 million in size, but a drop off in sales orders above $1 million, as customers postponed large purchases or reduced the size of the purchase order.

Overall, our Q4 financial performance was very strong.

Quarterly free cash flow was over $137 million, a record for the Company, and our non-GAAP operating margins remained solid at 38.6%.

Our services business completed the year with another strong quarter and a very healthy deferred revenue balance, moving into fiscal 2013.

As far as the outlook is concerned, it is appropriate to be cautious, given the very conservative spending environment we saw in the second half of fiscal 2012.

Having said that, we believe we have a number of exciting opportunities coming in fiscal 2013 to drive our revenue growth, and we plan to continue to invest in our business to take advantage of those opportunities.

We increased our sales force in 2012 by approximately 20%, and we expect to see the benefits of this investment throughout the year.

We have a clear and growing leadership position in the ADC market.

Our goal is to continue expanding our addressable market and further increase our market share by developing a broad array of integrated solutions running on industry-leading platforms.

During the next two quarters, we will be delivering our largest appliance refresh in four years.

Our next release of TMOS includes a number of new security and service provider offerings as well as products to enable cloud architectures.

For example, we will be releasing the industry's first application delivery firewall, ADF, that integrates level-three to level-seven security, including DDoS prevention and unique application fluency to prevent sophisticated application attacks.

ADF provides performance metrics clearly superior to those offered by our competitors.

We will also be delivering the industry's broadest range of hypervisor support at world-class performance levels.

For the service provider market, we will be delivering additional carrier-grade NAT functionality in a new software module as well as a policy enforcement module with DPI classification technology.

Additionally, we expect to release a new eight-slot version of our VIPRION that will leverage the PB300 blades, released last quarter, and effectively double the unmatched performance of VIPRION 4480, our current high-end platform.

As I mentioned earlier, we also expect to benefit from the rollout of LTE infrastructures with our Traffix Systems Signaling Delivery Controller and Diameter solutions.

The pipeline for these products is building steadily, and we are seeing a fairly large uptick in RFP and proof-of-concept requests.

F5 has the opportunity to be a leader in this area, which will not only provide growth opportunities over the next three years, but should also significantly enhance our position as a strategic supplier to global service providers.

We will review our product roadmap deliverables, as well as our market initiatives, in more detail at the Analyst/Investor Meeting in November.

Andy provided a projected revenue range as well as some of the high-level expectations for fiscal 2013.

As I mentioned several times over the last couple of years, we expect to see some seasonality in our business during Q1.

The first quarter seasonality, which is normal in the technology market and in line with our peers, is reflected in our guidance.

Acceleration of product revenue growth is the major financial goal for fiscal 2013.

I remain very optimistic about the future of F5 as we enter fiscal 2013.

We enjoy a very strong competitive position, and I believe our fiscal 2013 product deliverables are the most comprehensive we have seen in several years.

I'd like to take this opportunity to thank the entire F5 team and our partners for their tremendous efforts last year, and I look forward to their continued support in fiscal 2013.

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

(Operator Instructions)

Paul Silverstein, Credit Suisse.

I'm looking at the numbers.

It looks like you had a huge US Federal, up over 70%, but you're down in the financial vertical over 10%, and Telco was also down over 10% sequentially.

I'm trying to tie this together with the geographic commentary, where it looks like you had a good quarter everywhere but in the Americas, based on the numbers.

Is this a function, specifically, of financials, large deals, per your commentary, weakening?

And, how much of this -- I know the numbers are still small with respect to virtual additions, but in your commentary you noted that there was a big spike up, albeit off a small base.

But, is that starting to have an impact on the revenues?

First of all, I don't think that virtual additions is having any significant impact whatsoever.

The numbers overall are great in terms of percentage growth; they're obviously, pretty small in total.

So, I don't think that's an issue.

We have spent a lot of time on this after the quarter, and frankly, during the quarter.

And, we're pretty convinced when we look at the spending patterns of the large Fortune 500 companies, generally -- obviously, finance is a whole chunk of them within the Fortune 500; but generally, that is definitely a cautious spending environment.

As I said when I was doing my introduction, the spending patterns were actually pretty reasonable if you compare $200,000 to $500,000, $500,000 to $1 million, year over year.

However -- and this is mainly in North America because this is where most of our large deals tend to come from.

When you get to the $1 million-plus deal, we definitely seen a -- saw a slowdown, I should say, in the quarter, and in generally, in the second half.

John, was that specific -- those big deals, are most of those concentrated in the financial vertical, or is it really spread more broadly across your base?

I've also got a question about the linearity of the quarter.

If you could give us any insight on that?

No, they weren't really concentrated that much in financial.

There are examples of that, but not so much.

Service provider definitely was lower, at 19%, that's really towards the low end, where we saw some slowness there.

But, not specifically in financials.

Then to linearity, Paul, really what we saw is what we've seen over the last two quarters, where a little above 50%.

We normally follow the 50%, first two months; 50%, third month.

The last three quarters have been a couple of points higher than that, but consistent over the last three quarters.

Thank you.

Jeff Kvaal, Barclays.

I have a couple questions.

Number one, the verticals that you were discussing were both lumpy up and lumpy down, depending on the vertical.

How sustainable do you think the Federal strength is into the fourth quarter?

Then similarly, should we be expecting the Telco vertical to be recovering?

Then Andy, for you, in particular, I think in the past you've talked about the March quarter being a possible exception to the sequential growth for the year.

Can we confirm that you are not making that exception this year?

In terms of the verticals -- first of all, I guess this is pretty obvious, but the US Federal, we definitely expect to be down sequentially from the year end, which is extremely normal.

But, we feel very good about the team and the job they did and the relative year-over-year performance that we would expect to see throughout the year.

So, that's one thing.

The second question was --?

Was based on the sequential revenue growth --?

Yes.

But John, before you leave the verticals, how about Telco?

That's what I was, yes -- we are actually assuming a relatively slow Telco for the first -- for next quarter.

That could possibly bleed into the March quarter as well, but we're not talking about that yet.

But definitely, if we look forward to the guidance that we've given, we aren't expecting a strong service provider in Q1.

Then, to the sequential revenue growth, you're absolutely right.

If we look back over time, in particular going back three, four, five years, March probably has been our most difficult quarter, just based on seasonality, and that's led by North America.

What we've highlighted over the last couple years is that we've really seen, as we've grown to $1 billion and beyond, that we've seen definite seasonality in our December quarter, which is our Q1.

So, as we look at the lay out over the year, and we highlight it.

And, you see it in our guidance, our view on Q1; and we think off of that comparison, we can grow in March now.

But, we're also highlighting that we think, from a product basis, it will be stronger in the second half of the year versus the first half.

The other point about that is that the really big deal for us is going to be the release of Solar, with the functionality we talked about, as well as the product refresh.

We are absolutely -- and we'll talk more about this in the Analyst Day that's coming up.

But clearly, we are pushing very hard to get them available by the end of this calendar year.

So if we achieve that, then I would expect to see some reasonably quick growth coming from that refresh, which would obviously hit the March quarter.

Thank you.

Bill Choi, Janney Capital Markets.

Couple questions on the products.

First, what was ARX contribution in the quarter?

Also, when I think about big deals, I immediately think VIPRION 4400, but your commentary seems to indicate strength also on the 4400, so can you talk about what the larger products in your portfolio are doing?

And, are they still getting a digital module attach rate more the chassis deployment issues?

Thanks.

On the last part there, that as I -- now remember, that was a year-over-year number in terms of VIPRION sales; however, they've been pretty solid, quarterly, right throughout the year.

And, one of the characteristics we've definitely seen, is a higher rate of modular attach rate, which obviously drives the size of the system sale as well.

The 2400 has been strong from announcement.

But the products above that, the VIPRION products above that, have also been strong, again, with attach rate.

Service provider, obviously, was a bit weaker last quarter, but that is definitely the mania that we sell at the higher-end VIPRION.

And, I think that's going to continue.

Then, to the ARX question, its contribution to revenue was $5.8 million for the quarter.

Brian Modoff, Deutsche Bank.

Question around the product side.

You look at your guidance at the high end of the range at $370 million, assuming 30% year-on-year services growth, which is what you've been doing here recently, implies about 5% product growth year on year.

Can you talk about that, and also how you see product sales doing through the year?

You talked earlier about seeing product growth, but can you quantify that a little bit in terms of what you're thinking?

Are you talking about something closer to your traditional 15% to 20% range, or something below that?

We are not going to quantify it, Brian.

But to give you an answer -- so first of all, remember, we're talking about the refresh coming towards the end of the calendar year.

That's the target.

That, clearly, won't have a major impact on the first quarter, so that's one thing.

Secondly, don't forget the seasonality issue.

We don't want to be the only company out there that doesn't have seasonality.

I wish we were, but we're not, that has seasonality in Q1, so that's taken into account.

I feel, personally, very strongly that the product refresh, that the DPI functionality, that what we're doing with the ADF, the application delivery firewall, is going to drive that product revenue.

But, given this environment we're in, we're not going to throw numbers out there.

We're going to play it a quarter a time at the moment.

Okay.

Can you talk a little bit about VIPRION then?

Give us an idea what that did in the quarter?

Was it down sequentially along with Telco and -- mainly, with the Telco piece?

Actually, we don't break out the mix when we talk about the results.

I think we would say, as we look at our high end, generally, over our low end, we saw it pretty consistent.

Yes, if you look at -- the very fact that we talked about -- the VIPRION products, over the year, have been over 100% growth.

The very fact we talked about that, the VIPRION 2400 being hot, almost -- that means there are some issues there that we need to fix at the appliance range, from a competitive perspective, and that's what the whole appliance refresh is all about.

We feel really good about our VIPRION trends and the way they're going to continue.

Okay, thank you.

Subu Subrahmanyan, TheJudaGroup.

Could you talk a little bit about the opportunity with Cisco discontinuing their ACE development, how you're factoring that into your thought process in the first quarter and through the year?

John, you mentioned some security module sales numbers.

Could you reiterate -- could you remind us what those numbers were?

Okay.

On the issue with Cisco in terms of the announcement in the market, I think it could be very significant for us.

And by the way, I'm not alone in the room here, everybody feels that.

We did a North America quarterly business review on Monday, where we got to see the key management there, and they're very excited about it.

I'm going to pass over to Dan.

He could get some more details.

But, we're in the prime position here because a lot of these accounts tend to be larger accounts.

They want to have a company that's very focused in this market, with a great balance sheet and all that good stuff.

And, that's really us.

I think you're going to hear us talking very, very favorably about that opportunity during the year.

Subu, this is Dan.

We are pursuing that very aggressively out in the field all around the -- in all regions.

We've already seen a number of face-to-face meetings take place.

We've had lots of interest around it.

Cisco is doing, roughly, $200 million run rate per year in ACE sales.

Plus, they have a pretty significant install base over the years, starting local director and all the products that they've had over time.

We've got some great incentives for customers and partners, so we have our channel involved in this as well.

Also, I think in the short-term, it's important to know that the activities that Citrix and Cisco have going together are purely of a reference in nature.

So, there's always challenges with sales-force alignment and compensation, and how incentive will those people be?

Our challenge with Cisco, over time, has been getting invited to the party; and if we do get invited, we do very, very well.

Clearly, there are people that were at the party and are asking us to (inaudible) participate.

So we are, as John said, very bullish on that.

Let me add one more thing about this that I think is exciting for us as an opportunity.

This isn't just about replacing that base.

It's not just about that.

This is about giving us very significant opportunity to get into more Fortune 500 accounts and sale much more than the current base we've got.

Because what we'll be replacing, here, is mostly load-balancing type applications.

We will then work with all of our value-added stuff that we've got in TMOS -- security, optimization, the software module.

So, I think it is a much bigger opportunity than just replacing that base; and as I say, I think you'll hear us talking about that in quarterly calls throughout this year.

Erik Suppiger, JMP Securities.

On the Cisco front, what is assumed in your outlook as you -- in your guidance for the December quarter?

Are you assuming that you're closing much Cisco business, or what kind of sales cycle is there associated with that?

Yes, the way -- we do have opportunities in the pipeline already because of this opportunity.

Some of these opportunities are close-to-commit range, but I wouldn't say it's markedly incremental in terms of what we're currently assuming for the guidance.

As part of our normal way, we look at what's in the pipeline, what's the fact of pipeline.

And there is, yes, there are some deals that are related to Cisco in that.

Are they all in that?

I'm sure they're not because it's just happened.

So, I wouldn't think about it too much in relation to our guidance.

It's not been that significant.

How are you responding to Cisco with the partnering with Citrix?

Once they develop some integration with Cisco's other service products, how do you envision that you'll be able to address that?

I don't think the integration at the products they're doing, I think that's more aimed at a different space.

We are going to use our tried-and-tested technique here, in terms of competing with both Cisco and Citrix, with win rates in the high 80s, low 90s; which is, better product, more focus, great customer satisfaction, best performance, most functionality; I feel pretty good about that.

Strong partnerships.

Strong partnerships.

Okay.

Last quick question, then.

Andrew, what did you say the gross margin guidance was for the -- non-GAAP guidance was for fiscal '13?

We said that the GAAP was 83%.

Didn't give non-GAAP, but we think it will be consistent with, probably, close to 84%.

Very good, thank you.

Catharine Trebnick, Northland Securities.

Could you say how many of the VIPRIONs that are installed have an attach rate to virtualization?

Is there any way we could tie some of that virtualization growth to your growth going forward?

This is Karl, Catharine.

With the VIPRIONs, what's been very popular is attaching vCMP, which is virtualization for those platforms, and that's been very popular.

We have some very big customers, especially in commerce and other areas that are leveraging vCMP.

So, that's definitely been a really high trajectory with the platforms.

Okay --

The other module that's been very significant with VIPRION has been ASM and APM security modules.

Got it.

Then, one quick thing on Traffix and the release.

Are you planning to release this next version of TMOS in Q4?

Did I miss that earlier in the call, or you didn't say?

We didn't say, but our plan is to release at the end of this quarter, and then we'll start rolling out in the field going into next quarter.

Do you have -- have you had any betas yet for the new DPI technology?

Yes, we've been in beta for some time.

Okay, great --

With all major features that are coming out, customers are requesting those --

Whenever we come out with a significant release like this, beta is obviously one of the critical parts.

So, that's been going on for quite a while.

All right.

Thank you, gentlemen.

Tal Liani, Bank of America Merrill Lynch.

This is Eric Ghernati for Tal.

Sorry, this question has been asked a couple times in different ways, but I want to clarify it a little bit.

Assuming the refresh cycle -- there's no refresh in the March quarter.

Do you -- is there a reason to think that your product revenue would increase on a sequential basis, or reverse the sequentially down trend in Q1?

First of all, I think I heard you saying, we wouldn't expect the refresh of the products in the March quarter?

That's --

Sorry, I know late in calendar year, going to the March quarter.

Yes.

So in other words, if we complete our goal of having these products available at the end of this calendar year, we would absolutely expect that refresh to have an impact on the March quarter, absolutely.

Got it.

Okay.

Okay, that's helpful.

The other question that I had for you is with respect -- if that's the case, then given that the seasonality that's across some of your verticals like government and Telcos and financials, all of which are typically down on a sequential basis, where do you think the impacts will be most pronounced?

Is it technology and others, or --?

Yes, I think it will be pretty broad based.

As we come out with this -- the previous question was around DPI; obviously, that's focused on the Telco.

With the new hardware platforms we're coming out with, that's going to give us great opportunity in the more entry-level, which will be more international geographies.

I think it will be very broad based.

So, you think this could even benefit Telco in the seasonally slow Q1 -- sorry, Q2?

The one area that I said earlier, we'll see on that.

We have a fairly conservative view of Telco for this December quarter.

And frankly, we'll need to take a view as we move into January; and we'll give you updates on that, as to where we think that's going to be.

Okay.

One last question for me.

The disclosure around the security software revenue $55 million, up 90% year over year.

Clearly, a lot of that is incremental to your business.

I'm sure you're going to have to put a firm number around it, but how should we think about the growth outlook for this particular piece of the business going into 2013?

Again, we wouldn't give you a specific -- we will talk, by the way, in more detail about security in November.

We will do that.

We thought it would be a good idea, actually, to put some information out on it.

We are talking about ASM and APM security modules, specifically; and they, obviously, had 90% growth.

So, we're not going to give you a specific.

However, do we think it's going to be a good growth driver?

Absolutely.

We don't see that momentum -- we think that momentum will continue.

Okay.

Can -- sorry, can Dean comment on do you think incremental sales from this products revenue can get you close to your 20% growth target that you typically have?

We are not commenting on that as we move into this year, given the cautious environment we've been seeing, so we're going to do that a quarter at a time.

Thank you.

Ittai Kidron, Oppenheimer.

Guys, I wanted to talk about two things.

First of all, the security, for the first time I think you've quantified $55 million.

And Andy, correct me if I'm wrong, this is just ASM, APM just in module, not any service revenue attached to that, am I correct?

Yes, exactly.

It's not only not service revenue, but as John -- yes, service revenues John highlighted, but also nothing for our new application firewall, nothing on hardware that's been driven; those are just module sales.

Very good.

Is the margin on this business in the upper 90%s, is that the right way to think about this?

For the modules?

Yes.

It's pure software, so it's software margins.

Software margins, okay.

Regarding your Telco business, it's been down now for three quarters in a row, if I'm not mistaken.

And, it sounds like from your commentary -- I'm sorry, two quarters in a row, but quite substantially in each of two quarters.

And, it sounds like you're preparing for another down quarter in the December quarter.

I'm having a hard time understanding why would that be the case?

Why is that business deteriorating so fast --?

I don't think there's anything sinister or any trends there that's pure project -- project oriented, where we see the project, we see the rollout, the dates.

And that, unfortunately, gives you some lumpiness, and I think you're going to see that next year as well.

Could it be, then, that your win rate with within this vertical is deteriorating?

How do you gauge your presence there?

Definitely not.

That's not the case.

It's -- because most of the Telco deals that we're talking about that have a significant effect in the quarter; because most of them are VIPRIONs, we don't have any competition with VIPRION when we're doing this.

Okay.

Regarding the transition into the March quarter of 2013 -- so clearly, by the end of this calendar year, I would assume around your Investor Day, you're going to announce the new -- many of those new products that you've talked about through the call.

I'm trying to get an understanding whether you think there is the possibility that that creates a pause in demand from your customers, number one?

Number two -- and maybe that's one of the reasons your large-deal flow has somewhat slowed or been delayed or not closing as quickly.

Second, John, when you talk to customers, how much of a concern is there from the elections and the potential fiscal cliff in February?

Could be that this delay in business could last through, actually, the March timeframe?

Why isn't that more of a logical assumption?

That's an economy question; and frankly, it'll depend on the economy.

I don't think it's impossible, we'll see.

I do think, by the way, that a lot of the uncertainty when we talk about macro, we are including the election in areas like that.

Certainly, when we talk to customers, we are hearing a degree of entrenchment.

There's no question about that.

When that was at its really bad scenario in 2009, we almost saw that for a couple quarters; and then, of course, we saw pretty massive, suppressed demand.

But, I really think that the tailwinds we've got going for us puts us in a really good relative position.

In terms about people waiting for the product, we have no significant anecdotal information on that at all.

I mentioned, in one day, we met with our sales force.

We didn't hear that -- I'm not saying it's impossible.

There's probably some examples, but I don't think that's going to be a material effect on the actual quarter.

Very good.

Good luck, guys.

Amitabh Passi, UBS.

I had a couple of questions.

The first one, I think you characterized your expectations of revenues from Traffix being material in the next fiscal year.

I was wondering if you would help us bracket how you define materiality?

Would it be at least 10% of your sales?

And then I had a follow-up.

We don't break it out like that.

But material test, it's going to have an impact on the top-line number that allows us to increase investment and increase marketing efforts to expand that footprint.

We're really looking at it, now, as an opportunity to grab footprint in that space.

And, it's about getting out there and winning those deals.

So, that's our approach.

We also think, by virtue of having that Diameter footprint and data center, it really helps enable us with our DPI solution because that requires a tie in directly to the Diameter interface.

In our upcoming release, we're a full Diameter Proxy, which is built right into BIG-IP.

So what means now is, we occupy this footprint where we can do traffic steering, apply our intelligence to the traffic that's going through the carrier data centers, but also, being able to communicate with other parts of it through our diameter routing.

Got it.

As a follow-up, John, I think a lot of people asked you about Cisco ACE.

I wanted to ask you a slightly different question.

You've been integrating security in your appliances.

We are now seeing some of the security vendors, whether that be Juniper or Citrix, trying to move to where it is integrating -- I'm sorry, Palo Alto, trying to move towards integrating load balance and functionally.

I'm curious how do you -- what you make of some these gyrations in the marketplace?

Are you seeing any impact yet, or do you think it will be a while before any of the security vendors have any success integrating load balancers?

I think that, yes, that will be -- that's going to be a long time.

And frankly -- and this is where this word, load balancer, can be so generic in meaning.

What we have, remember, is a session-based, full proxy that basically just doesn't do packet load balancing.

So, we can do it at incredible speeds, and we have the application fluency associated with that.

So, we don't see that.

One of the things I said when I did my introduction was, I mentioned that our application delivery firewall is going to have performance above the competitors.

We are talking about very significant performance.

I think that that, and the functionality of our application fluency in areas like that, the performance is going -- in fact, price performance is going to be major advantage for us.

Yes, Amitabh, this is Manny.

Let me add something to it; and John highlighted it, we have this full-proxy capability inside our device.

When we orchestrated our technology, whether it be hardware or software, it has a Layer 7 full proxy, which allows us to move through the protocol stack and add additional services in one pass through, through the device, at a session layer.

That is significantly different than taking a traditional firewall and trying to apply Layer 7 intelligence to it.

So, putting a load balancer inside a firewall is a complicated issue.

You almost have to have the right platform from the foundation.

What we've done is, we've built the right platform, starting with some availability services, and that put security services in it.

We think we have a leadership position.

The data will prove that out, when we announce it later in this year.

And, I think you'll see some performance characteristics that are, orders of magnitude, greater than anything in the market.

Thank you, guys.

Appreciate it.

Ryan Hutchinson, Lazard.

Clarification, and then a question for Karl.

The clarification, just some color around the fourth quarter contribution from security?

Obviously, appreciate the insight, helps us look at the core business as well.

Then, the question is more on SDN, given there's been a lot of investor debate.

There's, obviously, a potential for an architectural shift here to occur, whereby you could write applications to a controller to serve the same function that some of the physical appliances are playing in the network.

Some argue that you could even go as far as load balancers, firewalls, as we look out over five years.

So one, Karl, I'd like to get your insight into if you think that's even remotely possible?

And two, if it is, how you guys participate?

Thanks.

Yes, it's a big question.

We're going to spend a lot of time on this at the Investor Day.

We're absolutely -- we have SDN in the roadmap, and we're doing a number of things with our partners to support that.

But, we'll get into a lot more detail in a couple weeks, here, on exactly what we're going to do.

Great.

On the security, Ryan, we don't -- we, obviously, we don't talk about security numbers in the quarter.

We're going to talk a lot more about it in November.

We mentioned that the growth rate on the modules of ASM and APM, for example, and how significant that was, and we expect that to continue.

We still -- we didn't talk about the data center firewalls, and we won't project on that as well.

So, can't give you numbers here, but it's pretty damn significant on a quarterly basis.

Ryan, this is Manny.

Let me add some -- one additional comment on SDN, just so you're aware.

As Karl said, we'll go through it in great detail.

But, the one great thing about our platform is our platform has, already, a separation of data plane and control plane.

Consequently, it's very well suited to play in an SDN environment.

And, what you'll see is, as we enhanced to support the SDN protocols, whether it be DX-LAN and Btree, and/or OpenFlow, we'll sit in those SDN installations, if you will, and be able to provide services.

So, customers who are used to traditional [f-box] services will be able to carry those services forward in a hybrid environment.

And, we'll go through it in a lot of detail.

Great, thanks.

Thank you all for joining us today.

We hope to see you in New York at the Roosevelt Hotel on November 15.

Thank you.

This concludes today's conference.

Thank you all for your participation.

You may now disconnect.