F5, Inc. (FFIV) Q3 2011 Earnings Report, Transcript and Summary

Good afternoon and welcome to the F5 Third Quarter Financial 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. (Operator Instructions) I would now like to turn the call over to Mr. John Eldridge, Director of Investor Relations. Sir, you may begin. John Eldridge – Director, Investor Relations: Thank you, Carol and welcome everyone to our conference call for the third quarter of fiscal 2011. The speakers on today’s call are John McAdam, President and CEO and Andy Reinland, Senior VP and Chief Financial Officer. Other members of our executive team are also with us to answer questions following their prepared comments. If you have questions following today’s call, please direct them to me at 206-272-6571. If you don’t have a copy of today’s press release, it 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 In addition, you can access an archived version of today’s live webcast from the Events Calendar page of our website through October 25. From 4.30 p.m. today until midnight Pacific Time, July 21, you can also listen to a telephone replay at 866-511-5157 or 203-369-1957. 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. Now, I’ll turn the call over to Andy Reinland. Andy Reinland – Senior Vice President and Chief Financial Officer: Thank you, John. In the third quarter of fiscal 2011, F5 achieved solid sequential and year-over-year growth. Revenue of $290.7 million was at the high end of our $287 million to $292 million guided range grew 5% from the prior quarter and grew 26% compared to a very strong Q3 a year ago. GAAP EPS of $0.77 per diluted share was above our guided range of $0.69 to $0.71. Excluding stock-based compensation expense, non-GAAP EPS of $0.97 per diluted share was also above our guided range of $0.89 to $0.91. The strong EPS results reflect additional R&D tax credit benefits of approximately $0.05 per share recognized in the current quarter. Product revenue of $179.3 million grew 22% year-over-year, and represented 62% of total revenue. Service revenue of $111.4 million grew 34% year-over-year, and accounted for 38% of total revenue. Book-to-bill for the quarter was greater than 1. Both APAC and Japan delivered strong revenue growth during the quarter. APAC which represented 16% of total revenue grew 58% year-over-year and Japan as 7% of total revenue was up 42% year-over-year. EMEA representing 20% of total revenue grew 15% from the third quarter of fiscal 2010 and was down sequentially. Accounting for 57% of the total, revenue from the Americas was up slightly compared to the prior quarter and grew 22% year-over-year. During Q3, our core application delivery networking business accounted for $282.5 million compared to $270.5 million in Q2. Revenue from our ARX file virtualization business was $8.3 million up 16% from Q2 and 32% from the third quarter a year ago. Both the telco and technology verticals represented 21% of total revenue in Q3. The financial vertical accounted for 19%. Total government revenue was 10% including 5% from U.S. federal. In Q3 we had two greater than 10% distributors, Avnet which represented 16.4% of total revenue and Ingram Micro which accounted for 10.6%. Our GAAP gross margin in Q3 ticked up slightly to 82%. Excluding approximately $2.4 million of stock-based compensation expense, non GAAP gross margin also moved up to 82.8%. GAAP operating expenses of $150 million were within her target range $147 million to $151 million. Excluding $20.5 million of stock-based compensation expense, non-GAAP operating expenses were $129.5 million. GAAP operating margin was 30.4%. Our non-GAAP operating margin which excludes stock-based compensation expense was 38.2%. Reflecting the R&D tax benefit, I mentioned earlier, our GAAP effective tax rate for Q3 was 30.6%. Excluding stock-based compensation, our non GAAP effective tax rate was 29.8%. Turning to the balance sheet, cash flow from operations was $101.1 million, free cash flow for the quarter was $92.2 million. We ended the quarter with total cash and investments of $1.57 billion. DSO at the end of Q3 was 48 days. Inventories were 17.9 million. Deferred revenue increased 3% sequentially to $321.9 million. Capital expenditures for the quarter were $8.8 million and depreciation and amortization expense was $5.2 million. We ended the quarter with approximately 2350 employees an increase of 95 from the prior quarter. During the quarter we repurchased approximately 472,000 shares or common stock at an average price of $105.96 per share for a total of $50 million. Looking ahead to Q4, while we remain cautious about the impact the ongoing financial uncertainty in Europe might have on our EMEA business, we are seeing strength within our North America enterprise business and we believe our US federal business will reflect to seasonal strength we typically see in Q4. We believe the key drivers of our business remain intact and that we will continue to achieve solid sequential and year-over-year growth in Q4. With that in mind, our revenue target for Q4 is $307 million to $312 million. We expect GAAP gross margin to remain strong in the 81% to 82% range including approximately 2.5 million of stock-based compensation expense. We anticipate GAAP operating expenses in the range of $156 million to $160 million. This includes approximately $21.5 million of stock based compensation expense. Our GAAP EPS target is $0.75 to $0.77 per diluted share. Excluding stock compensation, our non GAAP EPS target is $0.97 to $0.99 per diluted share. We are forecasting an effective tax rate of 35%. Excluding stock-based compensation, we expect a non-GAAP effective tax rate of 33%. We plan to increase our headcount by more than 125 employees in the current quarter. We estimate our DSO will be in the mid-40 day range. We expect inventory levels within the range of 18 million to 20 million and we believe our cash flow from operations will be in excess of $110 million. With that, I will turn the call over to John McAdam. John McAdam – President and Chief Executive Officer: Thanks, Andy and good afternoon everyone. The F5 team delivered another solid performance in the third quarter of fiscal 2011. The Asia Pacific, Japan region with the start of the quarter with year-over-year growth rate over 50%. The Americas year-over-year growth rate up 22% was constrained a bit by some projects spending delays in the U.S. federal market as well as some project spending delays particularly in the financial vertical. The EMEAs region’s year-over-year growth of 15% was clearly impacted by the economic challenges currently present in that region. We passed a significant milestone on our stellar balance sheet with cash and investments surpassing the $1 billion mark, currently at $1.06 billion having repurchased $50 billion worth of common stock in the quarter. Our services business once again produced solid results with 34% growth in revenue along with strong contribution to our overall profitability. Our non-GAAP operating margin was very solid at 38.2%, which is our highest level to-date. We also saw improvement in our ARX sales in Q3 with ARX revenues growing 16% sequentially and 32% year-over-year. We started shipping our new VIPRION 2400 product known internally as Victoria, towards the end of the quarter. The VIPRION 2400 leverages the significant success of our current VIPRION solution by providing industry leading functionality at a various rate of price point. With the VIPRION 2400 chassis-based architecture, customers enjoy enhanced availability features and the flexibility to scale the ADC infrastructures without changing network, application or device configuration, leading to dramatically reduced operating expenditures. As we mentioned in our press release announcing availability of this new product, the VIPRION 2400 is shipping initially with TMOS Version 10.2.2 and will support Version 11 of TMOS, when it is released. Initial sales and customer interest in the VIPRION 2400 has been very high and we expect a level of interest to continue to increase during Q4 and continue additional momentum in fiscal 2012 as customer’s option of Version 11 accelerates. TMOS Version 11, which is target to ship in this coming quarter, includes over 150 new sophisticated management and scalability features to enhance datacenter consolidation and cloud architectures. Version 11 also includes new application visibility and management features, specific solutions for the telco market, and significant software and firmware performance enhancements to many of our software modules. Version 11 also also includes a sophisticated Virtual Clustered Multiprocessing Technology, vCMP. That combines virtualization and multi-tenancy capabilities to help customers consolidate and efficiently manage application delivery services. VCMP enables multiple instances of BIG-IP software to run on one device and provides enterprises the unprecedented ability to have complete logical separation of software version and instances on a single highly scalable device. This capability is critically important for large enterprises and cloud and other service providers, who need on-demand scalability and the ability to ensure that each group's resources in network traffic are fully isolated from one another. As far as the overall business outlook in concerned, I feel very confident about our prospects both in the short-term and as we move in to the final quarter of fiscal year 2011 and for fiscal year 2012. At our last investor conference, we highlighted an application delivery controller technology is the starting point to address our major market opportunities such as security and service provider. The key to this expansion is TMOS and our ability to deliver application level intelligence at network speeds. Version 11 contains significant enhancements that directly address these markets. For example, the majority of money spent on security to date has been targeted at protecting the network. F5’s market leading and award winning application firewall solution, the application security manager is becoming increasingly vital to our customer’s as attacks on their IT infrastructure have become significantly more sophisticated, targeting not only the network, but applications directly. The recent high profile hacking exploits against major banks, governments, and other corporations to demonstrate the inherent weakness of traditional firewall and IP solutions and highlight the need for a security solution that not only protects the assets of the networks, but of the application as well. ASM coupled with the core capabilities of TMOS allows our customers to blow up this new generation of sophisticated hacker exploits. We have major Fortune 500 customers replacing traditional network firewalls entirely with big IP. Along with the significant additional security functionality in V11, our short-term product roadmap include additional classification, enhanced network firewall capabilities, and broader application protection that should further accelerate the opportunity to expand our presence in the security market. We believe this opportunity coupled with our strategic footprint in the data center will significantly expand that addressable market in fiscal year 2012 and beyond. In the context of several global macroeconomic issues, we delivered solid sequential and year-over-year revenue growth in Q3. And as we stated last quarter, we continue to believe it is prudent to remain cautious in the short-term. Having said that, we believe there are real growth opportunities for F5 in the foreseeable future and we plan to continue aggressively hiring to expand our sales and marketing service and development organization and enhance our prospects for future sustained growth. In conclusion, I would like to thank the F5 team, our partners and customers for the support last quarter. And we will now hand the call over for Q&A.

Thank you. (Operator Instructions) Our first question today will be from Rod Hall, JPMorgan. Your line is open. Rod Hall – JPMorgan: Yeah. Thanks for taking my question, guys. Just a couple of quick ones, I guess. The first thing that I guess I wanted to see if it gives you a comment further on is the EMEA weakness. Do you think that that’s just – we’ve heard it from a couple other companies, do you think it’s just a short-term hiccup driven by all these negative headlines or do you feel like it’s a little bit longer term trend that’s developing there? So, I am just curious if you could give us any color on that? And then I guess the federal government situation in the U.S. is pretty obvious, but it would be interesting to hear if you have any more color on that. And we are all assuming it’s just going to get worse over time, but would be interesting to hear what you are thinking about that? And I have a couple of additional follow-ups to that.

Yeah, on EMEA, I mean, the answer is we’re not looking too far out here, because frankly in this type of environment, it’s difficult to go more than six months. So, if you look at, first of all, 15% year-over-year isn’t bad considering some of the economic issues. We have taken a fairly conservative forecast in terms of Q4 for EMEA as well. So, we are not looking for much growth sequentially there at all. We do feel good about the forecast that we have been given. And actually the pipeline is pretty good. Of course, you can see a pipeline growing when you get projects that get pushed. But overall, we feel okay about it. How long it will last is hard to tell. In terms of federal, we did see some deals slip. Having said that, our federal pipeline and we did a review with the whole of the U.S. management on Monday and our federal pipeline is very large and we feel actually pretty positive about our position. Rod Hall – JPMorgan: Okay. And then just, I guess, the follow-up with is I am wondering whether the 95 headcount additions, you said more than 125. Are you going to try to catch up and can give us any further feeling for why it was 95, I assume it’s just you’re just still struggling to find the people quickly enough and get them in place?

Yeah, we started off. Typically, when we start off the quarter we have a lot of acceptances that join over the next, say, maybe the first month of the quarter, but we know they have already accepted the offer. That was lower last quarter than it typically has been as higher this quarter. So, we never guarantee anything, but we are definitely going to try and push for the 125 plus.

Thank you. Our next question will be from Alex Henderson, Miller Tabak. Your line is open. Alex Henderson – Miller Tabak: Thanks. I was hoping you could give us a little bit more clarity and detail around the telecom segment. The fall-off in telecom from 3Q to 4Q last year calendar hasn’t really recovered very much percentage wise here. It’s up a percentage point each quarter. But can you give us some sense of what’s going on there in terms of customers coming back in and re-upping, expanding your footprint with them, the increased commitments, or anything that would give us some better sense of the trajectory of that business. And then just one factual question, can you repeat what you said the OpEx number was supposed to be non GAAP because like I said I didn’t catch that.

Sure, in the guidance, Alex. Alex Henderson – Miller Tabak: Yeah, in the guidance.

So, OpEx was, operating expenses would be in a range of $156 million to $160 million. And I said that that includes approximately $21.5 million of stock-based compensation expenses. Alex Henderson – Miller Tabak: So, excluding, to get the non GAAP – I didn’t get the exclusion part. Great. So, going back to the telco piece.

Yeah, in the telco piece, I mean we did see obviously an uptick in terms of the percentage this quarter from previous quarter, and of course that had growth in it. So, we had uptick in the growth. So, we did make progress there. I mean, it is much the same scenario which is we have opportunities with large network translation, with IPv6, with traffic steering is probably the biggest opportunity, some of the projects are lumpy. Yeah, I think it’s going to stay that way for some while. Alex Henderson – Miller Tabak: Do you see any increase in penetration at some of the big tier 1s and some of the key customers that would give you some sense that that is going to continue to increase as a percentage of sales going forward?

I think it’s going to stay in 20% to 25% range, and depending of any project drop, you will see it going up and down typically in that range. I know it was 19% a quarter before, but typically we see it in the 20% to 25% range. Alex Henderson – Miller Tabak: Okay, and then one last question. On the European piece, can you give us any geographics play within Europe? Was there any particular countries that were more egregious than others and how do you look at that mix across boundaries? Thanks.

This is Mark Anderson. I think we saw, much like last quarter we saw weakness in some of the more macro affected economies in EMEA. Germany wasn’t great, UK wasn’t great. But the rest of the country did pretty well, excuse me, rest of the theater did pretty well. I think like other vendors we are seeing deals taking a little longer to close, customers being a lot more cautious. I think that’s pretty it.

The next question is from Mark Sue, RBC Capital Markets. Your line is open. Mark Sue – RBC Capital Markets: Thank you. John, it’s two quarters in a row of limited upside following a quarter where Europe was also below plan, so one might argue that it should have been factored in. Do you think that’s a larger issue related to saturation of the market, maybe there's no more share to gain? Is it somehow related to the lack of hiring and sales coverage in the past? We saw something like this in late 2008 and I'm trying to see if we should be drawing some comparisons, if any.

No, I don’t think is that all. I mean obviously, if you’re below forecast, you have made a mistake and you need to try and address that. But, in terms of where we sit, I think we’ve got fairly robust forecast for Q4. You heard me saying few really good some of the opportunities that we’ve got coming in 2012. Our pipeline in North America is the highest that’s ever been which is very significant and we saw a fairly – and that’s not just a general pipeline, but attractive pipeline which is very important because that’s the pipeline that we expect. It’s got very good chance of closing. So, we are not seeing any signs of that. Is that tough environment to some degree? Yes. I mean, frankly we saw some points during the course that we’re probably going to exceed, but then we saw some of the slippage I talked about in federal and in some of the major account verticals like in finance. But, overall, and you take any medium term, we feel good.

Thank you. Our next question is from Ittai Kidron from Oppenheimer. Your line is open. Ittai Kidron – Oppenheimer: Thanks. John, I will start with my traditional question, ARX. Is this the time to finally put out the cake and start celebrating? Is this the real driver, consistent one now going forward?

We are all smiling here, right. I think it’s a bit early to do that. I mean obviously we saw, we saw some good project wins last quarter, some really good ones. As I mentioned many times, when we get these wins, we tend to get very low customers that are willing to talk about the ROI they get and the productivity they get it gives them. We saw some more repeat buys, which was a good thing than normal. We hadn’t seen some as much for peak buys, we saw some of that. But we are not declaring victory on that one yet. Ittai Kidron – Oppenheimer: Okay, very good and I did want to go back to the federal business, clearly things were delayed this quarter and I’m trying to get a sense of how do you get your confidence that this was still close on time in the September quarter and the reason I’m asking that question is that, yes federal budget for this fiscal year has been approved. That said, you listen to some of the companies in the networking space and IT space and many have been point out that despite federal budgets being approved they are still lingering delays and despite some of projects, specific projects being approved, still dollars not flowing. For example, NetScout had a massive preannouncement because of that. IBM has commentary just this past Monday talked about the government channel again for a second quarter and the roll being even weaker than they planned. It seems like your hanging your hat on this thing happening here in the September quarter and I'm trying to understand what is their process and methodology by which you get this high confidence that this was still happen even though it didn’t happen for you for this third quarter?

Yes, and although we saw slippage in the quarter, and we did. We also saw tremendous performance by the federal team. The year-over-year growth was actually very significant. The federal team are probably listening. I don't want them to think they didn't do a good job because they did. They did an excellent job. The real issue is the size of the pipeline and the opportunity and then of course, you've got a large pipeline like this, you obviously factor don’t and we think we have done that adequately. But we have a strong project pipeline with the projects in place. We have got a good feel for where they sit within the cycle. Again, I admit in this environment, you do have some uncertainty, but we feel pretty confident about what we have pinned as a number for that quarter four guidance. Ittai Kidron – Oppenheimer: Is there any color can you give on the federal in the sense of how much it is, is extension of existing projects versus new or how much of it civilian agencies versus non-civilian agencies, which you can argue a bit more defensive maybe spending wise?

Yes, a lot of it is projects that are established. A lot of it is that, certainly. And it tends to be involved with big systems integrators, as well. I don’t have the data right hand on the civilian versus military and/or intelligence. I know it’s reasonable in the latter. I don’t have the actual numbers.

Thank you. Our next question is from Brian Marshall, Gleacher & Company. Your line is open. Brian Marshall – Gleacher & Company: Great, thanks guys. If you look at the last couple of quarters we are adding 120, 125 employees obviously a little bit of a downtick this quarter. But when do you think, if you look at the product year-over-year growth over the last couple of quarters starting December 10 it was 44% year-over-year and then March it went down to 34%, in June it went down to 22% and it looks like guidance kind of at the mid range is applying 16% year-over-year product growth. So, you got deceleration of product revenue growth there obviously. When are those headcount additions that we made over the past couple of quarters? It really going to start to kick in and drive some of that product growth on year-over-year basis and do you expect in fiscal 12 that start to come back up at higher levels?

Yes, absolutely. And we have done a lot of work in that and we’ve obviously started doing first passes in 2012. I’m not going to be specific on the quarter. I don’t want to do that. However, when we look at 2012 and this will give you a feel for and I will give much more data in October. But we would be pretty disappointed with anything below on annual growth over the 2012 year below 20%. So in other words, we do see it stabilizing and we do see it starting to increase. And we will talk about in a little bit more detail come October. Brian Marshall – Gleacher & Company: Okay. Thank you. And then with respect to, if you look the, well I guess actually that kind of clarified some of my questions there. With respect to the revenue growth that you have seen over the past year or so obviously I think the vast majority that are well more than 50% that came from increased share gains definitely think about probably going to slow down, but we are going to continue to gain share going forward. But I do think your account penetration is going to increase pretty dramatically across the board not only in Fortune 500, but.

We don’t view that, when we look at the pipeline. When we look at the addressable market, share gains comes as you execute in terms of more Fortune 500 account, in terms of penetrating more Fortune 500 account, in terms of focusing on areas like security that I talked about. By definition, share gains go, they come. But really it’s all about having that opportunity. I don’t think share gains as such is an issue at all.

Thank you. Our next question is from Troy Jensen, Piper Jaffrey. Your line is open. Troy Jensen – Piper Jaffrey: Hey, it’s two-part question or two answers from you guys, but Mark, I would like to know how often you see Zeus in the field and John your thoughts on Riverbed moving into the virtual ADC market?

Yeah, hey Troy, it’s Mark here. So, we do talk a lot about competitive activity in our quarterly business reviews in each theatre each quarter. And really this we haven’t really talked about them very much and they are really not in the top five that we see on a regular basis.

I mean, Mark knows this better than me, Troy. However, I sat through three or four hours meeting on Monday with the North American management and I didn’t hear the name once. What was the second question? Troy Jensen – Piper Jaffrey: Well, the second one will be TMOS 11 is coming out obviously there is a lot of applications customized for service providers. What’s the risk of service providers passing until they evaluate the new operating system?

I don’t, I mean, we look at our service provider forecast and we look at the pipeline is based on projects and it’s not based on projects waiting on these types of functionality. So, I really don’t believe that’s an issue. Karl, I don’t know if you mentioned?

Yeah, hi, Troy, this is Karl. I just want to clarify also, because Version 11 isn’t just about service provider features. That’s one aspect of the release. Its major new infrastructure features like iAPP and vCMP as well as our centralized management. There is a bunch of things we are doing for the service provider market, but also for the enterprise, security, and other markets as well. So and it builds up on our previous technology. It’s a major step, but it’s not like, I think we have seen anybody out there in the service provider market stopping and waiting for it to show up. So, I hope that answers your question there.

Thank you. And the next question is from Nikos Theodosopoulos from UBS. Your line is open. Nikos Theodosopoulos – UBS: Great. Two questions. First on Japan, I think you were expecting that to be down sequentially and it was up strongly, can you comment on what changed there and what that might mean for the next quarter? And a comment on linearity, did you see the normal linearity of 50% in the last month or was it better or worse than normal? Thank you.

Yeah. So, on the linearity question to start with, consistent with last year, it was a little bit higher in the third month than we normally see, but not a marked difference and consistent.

And then, regarding Japan, yeah, we did expect it to be maybe slower because of all the disruption in it. The resilience of the team and frankly, the Japanese nation, they just carried on really quickly and we saw a really strong quarter with any disruption of any kind. The thing that was very, very positive for us in Japan and actually in the rest of Asia was there is a distinct trend now from lower product sales to higher product sales. And that we have been pushing this for Mark and his team for actually a couple of years now and we start to see some progress. So, we saw VIPRION type sales. We saw higher end. And that’s a trend that we are seeing. We started to see in Japan and we have been seeing it for a few quarters now in Asia which is pretty good.

Thank you. And our next question is from Kent Schofield, Goldman Sachs. Your line is open. Kent Schofield – Goldman Sachs: Great, thank you. I was wondering if you could just update us on your virtual ADC strategy. And then also if I look at share buyback, there was a pretty big acceleration it was like over $120 million this last quarter, around $50 million the previous, but that compared to an average of $20 million for the previous eight quarters or so. How should we think about share buyback going forward? Thank you.

On the share buyback, actually the total this last quarter was 5$0 million. Kent Schofield – Goldman Sachs: So…

I don’t know where you heard. Kent Schofield – Goldman Sachs: No, I may have – I must have pulled that wrong number.

Okay.

Okay, okay. And Kent, this is Dan. So as far as the virtual ADC, just virtual additions of our products in general and our strategy there, so we embarked on that course sometime ago. We launched the first product over a year ago now. And we now have almost, I believe, all our products available in virtual additions. So, I have been very, very pleased with the progress that we have seen there at the adoption rate, the downloads of trial additions, and more importantly, people purchasing them as well. So, I think we’ve gone from a position, perhaps a little bit late, to the market with the first one out there, originally to now probably having the most comprehensive solution than any vendor in our space.

But, I mean the big opportunity we see with virtual version, we’ve had – as Dan said quite a while now is that, you can develop on it, you can test on it. And then what you can do is probably deploy on larger systems. Now that’s only the thing we have seen. We have seen customers buy it for production, but typically it’s for development and then followed by using, like, VIPRION for production.

And Kent one last piece on that, really, having the combination of the software and the hardware piece is really vital when it comes to our customers. So, there is some things like dealing with SSL traffic and other things are very computationally expensive, that frankly well suited to virtual versions. And so, having both of those turned out to be very, very important in the marketplace. And as I said I think between the functionalities that we have in the products and the selection that we have between the hardware platform and the virtual additions, I think we are solidly in the leadership position.

Yeah, Kent, one thing I will add to, this is Karl. On version 11, what we also provide is the ability for us to operate for the customers to manage virtual and non-virtual versions seamlessly and operate together. So, essentially manages one large context which we think is vital to scaling these large virtual environments. Kent Schofield – Goldman Sachs: Great. Thank you for the information. And the 122 would be the nine-month number, so thank you for that. So, it was around 50 million, around previous quarter, 50 million this quarter. Is that kind of the new run rate that we should think of going forward?

We have a discussion with the Board in every quarter, we make that decision. Kent Schofield – Goldman Sachs: Okay, great. Thank you.

Thank you. Brian Modoff, Deutsche Bank. Your line is open. Vijay Bhagavath – Deutsche Bank: Hi, this is Vijay Bhagavath, calling on behalf of Brian. Hi, John. Hi, Andy.

Hi, there. Vijay Bhagavath – Deutsche Bank: Question for you in terms of – I guess, we are seeing some major catalysts near term in the horizon and then one is obviously VMware’s vSphere 5. We are also seeing catalyst around mainstream applications, Microsoft applications, Oracle, SAP etcetera getting on virtual machines and obviously have the 10 gig upgrade opportunity early next year. So, I’d like to ask you in terms of how proactive is your team both in the sales side and also in the solution side working with companies such as VMware, Microsoft, SAP, Oracle etcetera and kind of capitalizing on some of these over the horizon catalyst and especially vSphere 5.

Sorry, Vijay, this is Dan. We are very, very active on that front. We have some very deep relationships with not only VMware, Microsoft, Oracle, many, many others out there as well, but in terms of the ones that they could mention. So, with the introduction of things like vSphere 5 or Exchange 2010 or new versions of SharePoint, we have things going on with them. So, when those vendors launch their products, we have solutions that are ready to go with them that have been verified by them as well and provide things that are useful for the customers at the end of the day which is really the most important aspect. So, changes in the landscape, they are evolving and triggering change for customers out there. We view very, very positive things and line up very nicely with our solutions.

One thing, Vijay, this is Karl, I mentioned to you, you asked about 10 gig, capitalize on 10 gig and the next version of our VIPRION blade, the Centaur Blades we call it, natively supports 40 gig out of the shoe. So, we will be supporting the next high speed port and also Victoria which we call VIPRION 2400 was designed for 40 gig and we will be introducing 40 gig core modules later on. So, we’re trying to very much focus on improving essentially connectivity in the high density interfaces to exactly to capitalize on these opportunities. Vijay Bhagavath – Deutsche Bank: Thanks. A quick follow-up, I mean, obviously you had an interesting at Telefónica Spain. So, any thoughts on kind of blueprinting that architecture and then looking to position that with other telcos, I mean such as including Verizon, AT&T in the US.

I mean, we wouldn’t be specific about project wins like that, but obviously we have a very tried and tested tactic which is if you a win a project that you can repeat globally, you go for it. And I can assure you at the sales level and the biz level we are very focused in doing that type of thing. Vijay Bhagavath – Deutsche Bank: Certainly. Thanks a lot. Thank you.

Okay, Carol let’s take two more calls, okay, two more questions for callers.

Thank you. The next question will be from Matt Robison from Wunderlich Securities. Your line is open. Matt Robison – Wunderlich Securities: Thanks for taking my question. Can you give us the number of DevCentral users at the end of the quarter? And also, you might have mentioned this, but if you could repeat the CapEx number you expect for the September quarter. And there is also, you mentioned strength in the pipeline for North American enterprise, but you didn't mention North American service provider. Is there any particular reason, why you didn't say that?

Let me just squash that one. So, the pipeline, when I was talking about the pipeline in North America, I meant strength in enterprise, service provider and federal. Matt Robison – Wunderlich Securities: Okay, thank you. So, back to DevCentral and CapEx then?

Matt, this is Dan. On the DevCentral, we finished the quarter at 82,243 registered users.

In CapEx, I actually didn’t mention on the call, but for the coming quarter I think it will be in the same range that we saw this quarter. Maybe a little higher and on the next call, the October call we will give you the outlook on CapEx for the year again. Matt Robison –Wunderlich Securities: Okay. Is it too much to ask to give us that range again, since we're not going back to last quarter's commentary?

The last quarter was $8.8 million and I think we will see it that range maybe a little higher. Matt Robison –Wunderlich Securities: At that level, I see what you're saying. So, $8.8 million to $9.3 million or something like that?

Yes, somewhere in the range. Matt Robison –Wunderlich Securities: Okay. Thanks a lot.

Thank you. And our last question will be from Jess Lubert, Wells Fargo Securities. Your line is open. Jess Lubert – Wells Fargo Securities: Thanks for squeezing me in there, guys. So, two questions, first on product sales, this is the third consecutive quarter that we've seen product sales deliver low single-digit sequential growth. So, I was hoping you might be able to comment as to whether or not you felt the product strength we saw last year was more catch up spending and perhaps this is the new normal for sequential product growth. And maybe you can provide some additional information as to what gives you confidence that sequential product trends will improve going forward.

Yes, I think it’s hard to deny, when you look at the numbers now, and you look at the performance, that it was definitely catch up, or maybe some suppressed demand especially in the Q3, Q4 cycle. There is no question about that. Having said that, as I said earlier, I do think we bottom out and then we start to accelerate and that’s going to be based on a lot of things. It's based on, obviously, the opportunity I talked about in security that becoming stronger for us. It's based on Version 11 and based on WAN optimization and web acceleration Web acceleration, for example, we have a new version coming out and with Version 11 that is a massive jump in performance. So, if you're a web-based application, which is where they increases, we are going to have a great optimization solution earlier. The VIPRION 2400 is big. We had a lot of stuff. I think and not last, but not least we have been hiring aggressively in sales over the year and that productivity moves from the six months to the one year, you will see growth there as well. Jess Lubert – Wells Fargo Securities: So John, is it fair to assume that we're near the bottom in that process?

I’m not going to be specific on the quarter. As I said Q3 and Q4 were tough comps. And definitely I think we would be very disappointed with less than 20% next year. Jess Lubert –Wells Fargo Securities: And then can you maybe just provide some additional details regarding metrics, regarding average deal size and how the pipeline is trending sequentially heading into the September quarter and how you're thinking about close rates in the guidance?

Yes, our average size was actually pretty consistent with last year. It came down a little bit, but not markedly lower?

And in terms of the close rates, what I actually assuming a lower close rate than we did in quarter three we assuming a lower running quarter four. I would like to think there’s some conservatism in that, but we will see, but yes, we are actually assuming a little bit. If you look that is a pretty big sequential uptick from a revenue perspective. So, we will see how that goes. Jess Lubert –Wells Fargo Securities: All right, very good. Thanks guys. John Eldridge – Director, Investor Relations: Thank you all very much for joining us and again if you have a follow-up calls please direct them to me John Eldridge and thank you for joining us and we will talk to you next quarter.

Thank you. This does conclude today’s conference. Thank you for your participation. You may disconnect at this time.