F5 Inc (FFIV) — Q1 2015 Earnings Call Transcript

Thank you, Brian, and welcome to our conference call for the first quarter and fiscal 2015. John McAdam, President and CEO; and Andy Reinland, Executive VP and CFO, will be the 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 In addition, you can access an archived version of today's live webcast from the Events Calendar page of our website through April 22. From 4:30 p.m. today until midnight Pacific Time, January 22, you can also listen to a telephone replay at (888) 673-3568 or (402) 220-6431. During today's call, our discussion will contain forward-looking statements that include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in our quarterly release and described in detail on our SEC filings. Please note that F5 has no duty to update any information presented in this call. Now I will turn the call over to Andy Reinland.

Thank you, John. Before I start my prepared remarks, I’d just ask you to be a little patient if I pause; I have been battling a cough, so with that we’ll get underway. Sales in the first quarter of fiscal 2015 reflected the seasonality we normally see at the beginning of our fiscal year. And in general, we saw fewer large deals this quarter compared to previous quarters. As a result, revenue of $462.8 million was in the lower half of our guided range of $460 million to $470 million, reflecting 14% year-over-year growth and down slightly from the fourth quarter of fiscal 2014. GAAP EPS was $1.21 per share, above our guidance of $1.10 to $1.13 per share. Non-GAAP EPS of $1.55 per share also exceeded our guidance of $1.46 to $1.49 per share. Both GAAP and non-GAAP results include a one-time benefit related to the retroactive reinstatement of the R&D tax credit for 2014, resulting in a benefit to EPS of approximately $0.08 per share on a GAAP basis and $0.07 per share on a non-GAAP basis. Product revenue of $240.9 million in the first quarter was up 10% year-over-year, down 6% sequentially, and accounted for 52% of total revenue. Service revenue of $221.9 million grew 18% year-over-year, 6% sequentially and represented 48% of total revenue. Accounting for 56% of the total, revenue from the Americas was up 14% from the first quarter of fiscal 2014. EMEA, which represented 25% of revenue, grew 20% from the first quarter of last year. APAC accounted for 14% of revenue and grew 9% year-over-year, and Japan revenue, representing 5% of total, grew 3% from a year ago. Sales to enterprise customers represented 63% of total sales during the quarter. Service providers accounted for 23%, and government sales were 13%, including 5% of total sales from U.S. Federal. In Q1, we had four greater than 10% distributors: Westcon, which represented 17.5% of total revenue; Ingram Micro, which accounted for 16.7%; Avnet at 13.9%; and Aero which accounted for 11.4%. Our GAAP gross margin in Q1 was 82.9%. Our non-GAAP gross margin was 84.1%. GAAP operating expenses of $251.1 million were within our target range of $245 million to $253 million. Non-GAAP operating expenses were $222.9 million. GAAP operating margin was 28.6%, while our non-GAAP operating margin was 35.9%. Reflecting the onetime benefit from the retroactive reinstatement of the Federal R&D tax credit for 2014, our GAAP effective tax rate for Q1 was 34%, and our non-GAAP effective tax rate was 32.3%. Moving on to the balance sheet, cash flow from operations was $186.4 million. In Q1, we repurchased just under 1.2 million shares of our common stock at an average of $128.70 for a total of $150 million, ending the quarter with approximately $1.17 billion in cash and investments. With the addition of $750 million authorized by the board for stock buyback at our most recent board meeting, approximately $931 million remains authorized in the share repurchase program. DSO at the end of Q1 was 50 days. Inventories were $27.6 million. Capital expenditures for the quarter were $10.3 million. Deferred revenue increased 20% year-over-year to $680.3 million. We ended the quarter with approximately 3,945 employees, an increase of 110 from the prior quarter. Moving on to the Q2 outlook, based on the strength of our current pipeline, including the return in the number of large deal opportunities and continued momentum from our key drivers, we anticipate sequential and year-over-year growth in the second quarter of fiscal 2015. Our revenue target for the quarter is $465 million to $475 million. GAAP gross margin is anticipated to be in the 82% to 82.5% range, including approximately $3.5 million of stock-based compensation expense and $2.7 million in amortization of purchased intangible assets. Non-GAAP gross margin is expected to be in the 83.5% to 84% range. As outlined during our Q1 earnings call, we anticipate an increase in stock compensation in Q2 related to the timing of our employee grants. As such, for Q2 we anticipate GAAP operating expenses in the range of $255 million to $264 million, including approximately $34 million of stock-based compensation expense and $0.5 million in amortization of purchased intangible assets. For Q2, we are forecasting a GAAP effective tax rate of 38.5% and a non-GAAP effective tax rate of 35.5%. These rates assume no reinstatement of the Federal R&D tax credit for 2015. Our GAAP EPS target is $1.07 to $1.10 per share. Our non-GAAP EPS target is $1.48 to $1.51 per share. We plan to increase our headcount by over 100 employees in the current quarter, and we believe our cash flow from operations will be at or around $110 million, reflecting the impact of two federal tax payments that we normally incur during our fiscal second quarter. With that, I will turn the call over to John McAdam.

Thanks, Andy, and good afternoon, everyone. Our revenue came in at the lower end of our guidance, and I’ll comment on that in a moment. I was pleased with the significant progress we made in all our major initiatives. For example, we have had some very strategic sales wins in the service provider market. We had a very successful launch of Silverline, our key component of our hybrid applications services strategy. We added significant functionality to our orchestration and management product, BIG-IQ, which was key to winning the strategic security wins and is also another component of our hybrid applications services strategy. We also continue to make great progress with our SDN partnerships, both in technology and in go-to-market initiatives. From a sales perspective, the majority of the shortfall came from the Americas region, where we experienced a larger than expected drop in million-dollar-plus deals in both large enterprise and U.S. Federal opportunities. We believe this was a seasonality issue due to a very large number of large wins closing during the fiscal year and Q4 drive. On a positive note, the pipeline creation rate in Q1 was very strong, and the timeline for the quarter was very good. Japan business was also slightly below internal forecast, but this was not a major factor overall. Both APAC and EMEA delivered year-over-year sales growth. The EMEA region was the star of the quarter and once again delivered an excellent performance with solid year-over-year growth. Our services business continues to deliver solid results and excellent profitability, along with a healthy increase in deferred revenue, which is now approximately $680 million and should bode well for future business. We continue to experience strong momentum with our Good, Better, Best sales motion in Q1, with customer adoption continuing to be very strong in the Best category, highlighting the success we are achieving with our security solutions. I was also encouraged by the continuing strong growth of our software revenue, which increased 44% year-over-year. The fastest-growing area in our software business is our core virtualization ADC. Our software growth is being driven by the increasing customer demand for hybrid solutions that allow greater flexibility in the deployment of application services within and across data centers and into the cloud. Our ability to provide our solutions as special software-only offerings across all the major providers, combined with our unique orchestration functionality in BIG-IQ, is enabling customers to move to software-defined data centers and NFV architectures. We are also seeing growth across our entire portfolio of software module offerings, driven by the rapidly increasing recognition that ADC is an ideal platform to ensure application security. Our security business continues to be our largest growth driver with strong sales across the security solutions portfolio including ASM, APM, and AFM. I already made reference to strategic security sales wins in the service provider market. We won a couple of AFM Gi firewall sales to Tier 1 service providers, which resulted in two transactions in Q1 being over $1 million each in value. I have mentioned several times last year that our BIG-IQ security management and orchestration product roadmap was being influenced by our Tier 1 service providers in North America. This initiative has proved to be very successful, and we are now starting to see some real momentum globally with our Gi firewall solutions, and we believe it can be a strong growth driver in fiscal 2015 and beyond. Overall, we had a solid quarter in the service provider market in Q1. We had several very strategic wins over and above the Gi firewall deals. For example, we won a $2 million-plus software-only NFC application with another Tier 1 service provider in North America. Our consolidation strategy and focus on security, NFC, Gi firewall services, and LTE applications is resonating well with the service provider as we offer them the opportunity to reduce OPEX while monetizing those added value services with our unique application and subscriber awareness. We continue to see strong sales of Cisco ACE replacements last quarter. As we have seen in previous quarters, customers continue to take the opportunity to add additional functionality. For example, our AFM and our AFM security module when implementing new F5 solutions. We have created a sales service web portal for ACE Migration, which complements significant experience and consulting expertise and increases our competitive advantage. Also, we intend to step up our market initiatives on the ACE opportunities starting this quarter to take advantage of our current momentum and experience in transitioning ACE customers to F5 ADC solutions. We have experienced a very positive reaction to the launch of our Silverline hybrid application services strategy from our sales force, partners, and customers. The initial launch included our subscription-based DDoS service and our anti-malware and phishing protection service. These cloud-based offerings delivered flexible, best-in-class services and offer a hybrid model complementing F5 on-premise products and solutions. We have already seen some excellent orders for both our subscription-based DDoS service and anti-malware solutions. We plan to increase the number of cloud-based subscription services starting with the vast AFM solution in the next few months. From a product perspective, we have a host of new functionality and new products on our roadmap. We have recently released a new high-end 2U platform, the BIG-IP 12000. This platform extends the performance of our content delivery platform by 25%, increases SSL performance by 600%, and more than doubles the number of high-performance vCMP instances. The SSL performance is really important given the SSL effort we are trying to foresee. In the near future, we will be enhancing our management and orchestration capabilities with BIG-IQ release 4.5. This release will include significant enhancements to our data center security products, AFM, and ASM, as well as comprehensive support for our SDN ecosystem to revise application monitoring capabilities with an SDN-enabled network. The BIG-IQ cloud module now supports SDN controller integration with Cisco APIC, VMware NSX, Alcatel Nuage, Microsoft SCVMM, and OpenStack. We will also be adding a new module, BIG-IQ ADC. BIG-IQ ADC provides centralized fine-grained application management across cloud-based SDN and traditional network infrastructure. The drivers of our business remain robust, and I expect momentum to build in this coming quarter and continue into the second half of the year. Our hybrid application services based on our Synthesis architecture and Silverline Cloud Services is resonating really well with our customers and partners. This strategy, combined with the strength of our partner ecosystems in areas like SDN, provides F5 with the opportunity to play a very strategic role as customers continue to strive for competitive advantage and maximum agility by moving to new technology architectures. Also, our portfolio of application products and cloud services continues to expand aggressively, which in turn significantly expands our addressable market and increases the types of revenue streams available to our sales force and partner channel. As far as the outlook is concerned and the indications that we expect both sequential and year-over-year growth this quarter. As I mentioned earlier, our business pipeline creation rate was very strong in Q1, up significantly over the previous year, and the pipeline of business this quarter looks very strong. In particular, we have seen a large increase in the number of large deals in the pipeline. We continue to plan for growth in the business by investing in headcount and infrastructure moving forward while delivering world-class operating margins. I continue to feel very positive about future business prospects for F5. I believe that our existing product portfolio, hybrid application services strategy, and our product roadmap are not only in line with customer and market trends but are also key to enabling these trends. In conclusion, I would like to thank the entire F5 team of partners and customers for their support last quarter, and with that, I will hand the call over for Q&A.

John, can you provide any further details on the large deals? I know you mentioned they were closing quickly, but is there a specific industry you could highlight? Also, regarding the complexity, is there any confusion surrounding the architectural changes?

No, we obviously checked closely, and while it may sound unusual, there wasn't anything complicated that we could identify. As we examined the pipeline throughout the quarter, it became clear that the forecasted deals weren't progressing as quickly as expected, particularly in the Americas and to some extent in the enterprise and Federal sectors. There wasn't any specific vertical that stood out; it was consistent across the board. While we weren't discussing a significant number of million-dollar deals, they certainly have an impact.

And those didn't become smaller deals, they should have got pushed out into Q2.

Absolutely. Yes.

Just one view clarify couple of things, John you talked about software 44% growth that was you were talking about the virtual edition software as opposed to software?

So 44% was the total software, which includes virtualization as well as modules and areas like vCMP within the ADC solution. Additionally, I mentioned that the fastest growing segment was the virtualization ADC. However, the security module software also plays a significant role in that growth.

Can you give us a sense as to how large is the security module part of that?

We typically don't provide that specific information because I don't have it readily available, but you'll hear me mention security several times during the call as it remains our biggest driver, and I anticipate that it will continue to be for some time.

Okay interesting I did want to drill down.

Because if you take the Gi firewall for example, you see that these were pretty significant deals and of course the security module ASM associated with it and that's pretty expensive.

I was trying to drill down a little bit on some of the Gi firewall wins. You talked about wins in Tier 1 service provider for that. Can you give us a sense as to who you beat out? I can guess I mean is this beating of Juniper, SRX or who you are beating out? And was this a new opportunity that you brought in for or was this an existing opportunity where you replaced someone and the sale was if so was up for functionality features, can you give us a sense as to what that opportunity looks like?

Yes. So typically, and the one that I was talking specifically on this call and we have seen Gi firewall deals over one wave. The one I was referring to for U.S. Tier 1 providers and nobody mentioned customer names of course. The $2 million-plus Gi firewall deals was directly related to frankly I think it's about two years we've been working with this particular service provider on the orchestration road map so that’s easy, the initial orders and that opportunity that can be big obviously is only when we execute properly.

Can you be specific who you’d be down on that or it was an incumbent there?

I mean incumbent typically in the areas in the U.S. as Europe. It’s not always been that; some of the replacements that’s typically incumbent.

Okay. One last thing I want to ask, services obviously were very, very strong; there is obviously a renewal period, happens but between deferred revenue and large company services is there any global connect that we can get a sense on as to what made the jumps that strong in services?

On the revenue side, the jump was we’ve seen for a number of years clients go for terminus contracts on 1st of January and the 1st of July. This quarter obviously ended with the 1st of January; we had a very strong push and we’re able to recognize more revenue within the quarter and as far as that push we build out the deferred revenue.

On the million-dollar deal idea, can you talk a little bit about it? It just seems like you’ve been talking a little bit more about large deals; is this a function of some of the new products, some of the bundling? Is this just something that we should think about more going forward in terms of having these larger deals in the mix?

No, we don’t think so. I mean if you look at last fiscal year 2014 we saw a pretty significant rebound in the large million-dollar-plus deals every single quarter; and obviously we saw a bit Q1 ending in December. And having said that, we expect to see that rebound given what we’re looking at, A, in terms of some of that slipped, and B, the creation rate that we’ve done over in Q1 which was pretty solid. So we expect the million-dollar numbers to be strong again in the current quarter.

Okay. And if some of that closing the deals from the December quarter.

Some of that is related to new deals, and I mentioned the strong rate.

John, I’m wondering when did the pipeline start to shrink for the quarter? When do you start to see the weakening? Analyst day was obviously pretty upbeat so was this kind of a late December phenomenon?

The pipeline tends to shrink on its own; when you begin to see deals finalize, you actually notice the pipeline being generated. What we observed was that the deals we anticipated closing did not materialize as expected and instead pushed into the following quarter. This typically occurs towards the end of the period.

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

And that’s exactly what I said in my script. We believe that’s what happened.

Great, thanks very much. John, in the past, in some of the quarters when the million-dollar deals have gone down, you’ve talked about that being indicative of macro; but this time you’re really saying it’s seasonality, so if you can talk about that why you’re convinced there? And then secondly, is there an element of meeting a little bit of recent year coming a little bit lower; is there any element here of this transition to kind of an on-demand software in virtual model, does that play any part in the miss from the quarter?

So, by there we were only guidance in the quarter remember, and I know that’s not good because we tend just to be clear. On the first part you’re absolutely right; if you go back to 2013 when we saw a fairly precipitous drop in $1 million deal, we did talk about macro more than once in that case, and that’s because when we look at that the forward-looking pipeline wasn’t anything as strong as it is looking today. So we’re seeing here this is a definite scenario in our opinion, but we really believe this was more seasonality linked than anything. And a piece of fed as well with us clearly some lack of transparency in fed and will know that budget and there were the two things that we see. But as we look forward, we see a stronger pipeline with the higher percentage of factoring in their pipeline, hence was repairing from actual. Second question was? Yes, translation from the software. No, we don’t see that; in fact, interesting enough, these software deals that we see from the virtualization perspective or from an NFD perspective, these are big. I mean these are actually pretty big deals as customers are feeling a closer application and buying a lot of instances of the virtualization. So maybe over time we’ll see that, but I don’t believe that was indicative this quarter.

We just have one follow-up with these large virtualization deals though, is there any change in the competitive landscape, any new competitors that you don’t traditionally see competing for the deals?

Michael, this is Manny. No, absolutely not, I mean what we’re seeing is we're basically seeing the need depending on being the enterprise or service provider. Of course customers who want to go software-only architectures. In general, there are some newer competitors sometimes in the market, but it tends to be the same classic competitors who have offered a hardware version and the software version.

And remember with these virtualization deals, we have the same concept Good, Better, Best; we have modules, we have all the competitive functionality, we have we have in this software side as well.

So on the larger deals again, I guess, I am curious because there are so many things happening between hardware moving to also support virtual editions, timed with SDN, your product becoming more software, again how much of this might be more product-specific, the deal getting more complex. It does seem like there is a lot of new technology to think about, and Cisco did have some weakness in its billings for the October quarter; guys like VMware also had some choppy bookings, so I am curious as you look at the complexity of products, can you really attribute any of that to the complexity?

Really, I don’t think we can, and I just don’t think we can. It’s based on what the deals that they have; we understand them. They’re very similar because what we have in Q4, we had a massive crucial with large deals, and we don’t see any changes in that landscape whatsoever.

One of the factors that affected the growth rate was that you refreshed your entire product line a little over a year ago, which led to a significant acceleration in growth last year coming off a challenging comparison. Are you noticing any effects from the pent-up demand that may have arisen from the product cycle, as well as a slowdown after customers completed their refreshes? What are your thoughts on that as a contributing factor?

You know, we thought but and if you look at the drivers and it's look through them again just to summarize but obviously product refresh we talked about there. It was low hanging fruit at the beginning, it’s not quite yet at the moment probably. Do we still have a very large installed base of products that we can refresh? Absolutely. So I think that area, obviously 12000 with SSL capability, I think is clearly at one point a product, but it sells its capability, and that’s a pretty good opportunity to refresh as well. But the big drivers of security with a firewall that we talk about at ASM with I think the wise solution and DDoS on-premise and off-premise. And then the service provider, we feel very good with the drivers there, from an NFD, from a security perspective, TCP optimization. We still feel good about ACE, I mentioned what we’re going to do there. And the SDN partnerships and in general the cloud movement I think is a growth possibility for us. So product refresh probably to some degree, but we still think has a big opportunity there.

Okay, last question given the growth in the pipeline, partly the new creation as well as deals slipping, with your guidance that product growth rate is continued to decelerate to somewhere near high single digits when you look at your guidance, how do you get this back up and what isn’t the guidance for the March quarter better just given the buildup of the million-dollar-plus projects? Thank you.

Historically last quarter you need to be careful with that because it’s always the beginning of the financial year for our companies, and we’re assuming, I hope, relatively conservative growth rates in the pipeline and we’ll see what takes us.

Two questions: first on the service provider side, if you could talk about given the CapEx backdrop, you certainly have some wins and share gain opportunities, so how do you think about the service providers vertical for this year as you expect it to grow as a percentage of revenues in fiscal ’14? And then in the virtualization side, I certainly hear you John that the deals are large but if you do a comparison with the architectural changes, if you had sold all hardware and services as you might have a few years ago versus a mix of hardware and software, what that is doing to the overall dollar value of the deals and profitability of the deal that would be helpful?

Subrahmanyan, this is Manny. On the service provider there are four major drivers that I think we talked more about them definitely in John’s prepared comments, which is consolidation across the board from a service provider point of view and that consolidation of services predominantly traffic-steering services, care-giving services, and some of the other services in there that were consolidating type of environment that reduces CapEx really for many of the operators throughout there because they’re going from multi-vendor to single vendor. Second major driver we have is security, which is also something we can overlay on that same footprint again through a consolidation point of view, but we call it out as a separate driver because of just the impact from the side associated with that. But there is NFV and the NFV footprint that we’re seeing out there which are still proving concepts to some degree and we are in various proofs of concepts across the world. We’re trying to see some of those pan out and that’s what happened in this past quarter and why we got a big bump, also on our software sales. And the last is the LTE of the mobility movement going to 4G networks which we’ve been feeding in the customer environment for the last two years. We’re trying to see there also from a driver perspective that as these networks get deployed, expected usage volume goes up; new devices are being enabled, meaning additional mobile handsets. But also new devices from the perspective of the Internet of Things that we’re going to see additional software licenses there. So those are predominately the four major drivers and those are usually either tackling the CapEx line from a consolidation point of view, or the monetization line from something along the perspective of LTE and being able to bring on new services to the market.

In terms of virtualization, I want to address a similar question again. First, these numbers are still quite small compared to the overall ADC market. However, the deals we are seeing are significant, and we need to market effectively to highlight the advantages of this hardware. Honestly, I don't see much difference in our approach. If you're looking for a specific platform, we don't believe there will be a significant change in our position towards the lower end.

And just to add one more comment to get on the software side that we see is we see an expansion of the application needs in the market segment. But I mean by that is historically a handful of applications in the typical enterprise and service provider got the ADC services because there was harder deploy, much more complex. As we move toward a much more software-based architecture, what you see is a broader set of applications getting these services got things to do apply to those services in the environment. So it’s actually, to a large degree, an expansion in the market.

Thanks, two quick follow up if I could. On the million-dollar deals, if you look across the broader enterprise we’ve actually seen a trend toward and you did as well up and saw this quarter, an increasing number of larger deals that closed. Do you think what you saw in December was company specific or do you think there were other factors here at play?

That’s a really hard one; we don’t know the answer to that, right? We just don’t do the answer. I think as more companies announce that there may be some more news here. I certainly wouldn’t call that; so I’m not calling as my crew either quite frankly. The other side of the coin is that the creation rate that we had is probably the biggest creation rate we see, is not the biggest and certainly one of the biggest. I’m talking about large deals, so table tell and tell us whether it’s a bigger issue or not.

Then the follow-up question is back to software and as we kind of compare contrast the software growth rate versus your reported product growth rate, it was 44% software growth rate this quarter versus 10% product growth. If I look at your Analyst Day, you’re talking about I think 41% security software growth rate versus 17% product growth rate. So there is a widening gap there between some of the growth in software versus product to appliance overall. Why shouldn’t we expect slightly more tempered growth going forward with the mix shift to software given the trends over the last couple quarters? And frankly now given some announcements around new products where you’re going to be pricing those products on a subscription basis.

I believe taking a medium to long-term perspective is accurate. We are indeed increasing our software sales, and we have encouraged our sales force to focus on this; it represents a significant competitive advantage. We anticipate that while migrating to BIG-IQ orchestration for software management across both cloud and data centers, you will notice this growth. However, it won’t be a complete revolution; rather, it will be an evolution. It's noteworthy that when examining GI firewall opportunities, the software component in that quarter is quite substantial, but the hardware component remains critical since it handles a significant amount of traffic, whether detailed or for mobile traffic firewall protection. Therefore, while the trend is promising, it would be unwise to take a single quarter, like Q4 compared to Q1, and view it as a definitive trend. We do not support that perspective.

Thank you very much. Most of my questions have been answered so I want to dig a little bit just around more of the edges if you will. First, wondering if you could talk a little bit about what you think what’s happening in Japan and APAC, you called out that Japan was a little bit below your forecast. And then conversely what you think was going right in EMEA in particular? With weakness of the Euro, seems like that could have been subject to a little more weakness than what you saw in the, I guess there is a follow-up to that is there going to be a point at which you feel like you have to reprise products for that market. And how should we take that into account?

Let me start with EMEA, which I believe has shown tremendous execution, supported by strong management. They have effectively covered their territory, secured significant deals, and focused heavily on software capabilities, especially in the area of security. Now, in Japan, the situation is different; the market tends to favor smaller products where they are quite competitive. They are investing considerable time in building direct business relationships, and while we have made some progress, it’s been slow, largely due to the sluggish economy. In APAC, we have implemented some management changes and feel optimistic about the direction the region is heading.

So, back to your looking forward is, you feel like you are going to, I know for a lot of other vendors they had to or they asked their retailers and buyers to absorb some of the impact of the depreciating euro. But wondering if you feel like you are going to have to change pricing in that market and how to take that into account, or are you going to be allowing basically effectively price increases to those customers?

Historically when we’ve seen fluctuations in currency because we U.S. dollars principally in EMEA, we have been able to navigate that, working with the partners and the resellers; conversely, they benefit at times when it’s gone the other way. So I am not sure we would have to fairly do a change in price strategy from that, but we will as we execute to the quarters take that into consideration as we look at deals and work with the partners and resellers to close business.

Excuse for interrupting, this is John Eldridge; we are going to take two more questions and then wrap it up.

Can we go back to the service provider for a minute? And any of the NFC, are you seeing it just to get more color around this. You said proof of concept, have you deployed? Has there been any deployment with NFC, et cetera? And then the follow-on question has to do with the enterprise spending. So first if we get out some color on NFC with carriers.

So yes, on the NFC side we have close to 2000 proof of concepts throughout the world just to give you a size of the magnitude of the transactions and those across all of the theaters. The wins that we recently seen which varied across two of the theaters are predominantly security-related wins where we are taking our security products from a software perspective and introducing inside that environment. Obviously they expand beyond security, they also are traffic steering type of deployments, but they are going into the concept of beginning to consolidate services on a virtual EPC, and a lot of the providers are moving in that direction fairly quickly. So we are doing well in the environment. We are integrating our stack with lots of different SPN providers in the market segment and that gives us a lot of flexibility to work with those operators. So it’s early days but we are seeing a lot of good momentum, a lot of good traction and proof of concepts are going favorably.

I will try to sneak two in here if I could. First on the Good, Better, Best, I just have an update there; you talked a little bit in the past, we know the Best option is doing well. Could you talk a little bit about the metrics there, how broadly is it through the sales force now? Is it fully everywhere? How many deals is it influencing? Are we still seeing growth from that or are we starting to reach a more full penetration? And then the second one John, I think you mentioned something about factoring the largest deals a little bit more into the next quarter; I guess part of that is conservatism. But I am just curious if given the uncertain macro, are you also as a team factoring in the rest of the business, the sub-100 million deals more than normal as well in the guidance?

So on the Good, Better, Best. The metrics are very similar; I mentioned still gravitating greatly towards Best. In fact, I think this quarter even higher in terms of a percentage towards Best. And if you look at where we are in the process, North America of Houston, and they have been pretty aggressive in selling that; we started in a couple of quarters later; we are now seeing EMEA starting but if more room to do the job. And then APAC and Japan in particular so tend to lag a little bit with making changes like that. So we expect that to start to rave up in the future as well. In terms of the factoring, actually when we do our factoring, we do intend to just factor by size of deal. We look at the overall factor, we look at the fact of timeline, and we look at close expectation. So that tends us to runway across the low deals up to the high deals as well. Okay, thank you very much for turning in. And we look forward to talking with you again next quarter.