F5 Inc (FFIV) — Q2 2015 Earnings Call Transcript

Thank you, Brian, and welcome to all of you to our Q2 '15 second quarter earnings call. John McAdam, President and CEO; and Andy Reinland, Executive VP and Chief Financial Officer, will be the principal speakers on today's call. Following John's comments on the quarter, Manny Rivelo, who will succeed John as President and CEO on July 1, will speak briefly about his goals and the company’s strategic objectives going forward. Other members of our executive team are also on hand to answer questions following these prepared remarks. 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 In addition, you can access an archived version of today's live webcast from the Events Calendar page of our website through July 26. From 4:30 p.m. today until midnight Pacific Time, April 23, you can also listen to a telephone replay at (800) 551-8152 or (203) 369-3810. 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 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.

Thank you, John. Our second quarter of fiscal 2015 was marked by solid sales in North America, where we saw both a rebound in sales from large deals compared to our first fiscal quarter and record sales levels in our service provider vertical. These areas of strength were somewhat offset by some late quarter softness in sales in our EMEA and APAC theatres and Latin America region, likely impacted by the strengthening US dollar. Revenue and earnings both grew sequentially and year-over-year, with several factors contributing to strong profitability and cash flow from operations. Revenue of $472.1 million grew 2% from the prior quarter and 12% year-over-year and was above the midpoint of our $465 million to $475 million guided range. GAAP EPS of $1.18 per share was above our guidance of $1.07 to $1.10 per share. Non-GAAP EPS of $1.59 per share also exceeded our guided range of $1.48 to $1.51 per share. The strength in EPS was driven by stronger-than-anticipated operating margin during the quarter, benefits to operating expenses and other income related to foreign currency and a more favorable tax rate than expected. Product revenue of $244.1 million, up 1% sequentially and 8% year-over-year, represented 52% of total revenue. Service revenue of $228 million increased 3% sequentially, 17% year-over-year and accounted for 48% of total revenue. Revenue from the Americas accounted for 57% of total during the quarter, EMEA contributed 24%, APAC 14%, and Japan 5%. On a year-over-year basis, Americas and EMEA grew revenue 14%, APAC 11%, and Japan revenue was down 3%. Enterprise customers represented 65% of total sales during the quarter. Service providers accounted for 24%, and government sales were 12%, including 5% of total sales from US federal. In Q2, we had four greater than 10% distributors; Westcon which accounted for 16.6%, Ingram Micro at 15.5%, Avnet representing 13.5%, and Aero which accounted for 10.5%. Our GAAP gross margin in Q2 was 82.5%. Our non-GAAP gross margin was 83.9%. GAAP operating expenses were $256.7 million at the low end of the guided range of $255 million to $264 million. Non-GAAP operating expenses were $223.1 million. GAAP operating margin was 28.1%. Our non-GAAP operating margin was 36.6%. Our GAAP effective tax rate for Q2 was 37%. Our non-GAAP effective tax rate was 34.6%. Turning to the balance sheet. Cash flow from operations was $142.3 million, driven by higher than expected profitability and stronger than expected collections in the current quarter. In Q2, we repurchased just under 1.4 million shares of our common stock at an average price of $113.29 for a total of $156.9 million, ending the quarter with approximately $1.13 billion in cash and investments. Approximately $774 million remains authorized under the share repurchase program. DSO at the end of Q2 was 50 days. Inventories were $29.3 million. Capital expenditures for the quarter were $10.2 million. Deferred revenue increased 23% year-over-year to $720.6 million. We ended the quarter with 4,035 employees, an increase of 90 from the prior quarter. Now for the Q3 outlook. In keeping with recent historical patterns, ongoing strength of our major drivers, and a robust pipeline, we anticipate continued sales momentum with sequential and year-over-year growth in the second half of fiscal 2015. That said, we believe the possible continued impact of foreign currency should be considered as we move into Q3. With that in mind, our revenue target for the third quarter of fiscal 2015 is $475 million to $485 million. GAAP gross margin is anticipated to be in the 82% to 82.5% range, including approximately $4 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. We anticipate GAAP operating expenses in the range of $257 million to $266 million. This includes approximately $34.5 million of stock-based compensation expense and $0.7 million in amortization of purchased intangible assets. For Q3, we are forecasting a GAAP effective tax rate of 37% and a non-GAAP effective tax rate of 35%. Our GAAP EPS target is $1.16 to $1.19 per share and our non-GAAP EPS target is $1.57 to $1.60 per share. We plan to increase our headcount by 100 to 125 employees in the current quarter and we believe our cash flow from operations will be at or around $170 million. With that, I will turn the call over to John McAdam.

Thanks, Andy, and good afternoon everyone. Before discussing our Q2 results and Q3 outlook, I want to make a few opening remarks about the organizational announcement we released today. Firstly, I’d like to congratulate Manny Rivelo on his appointment as President and CEO of F5 effective July 1st of this year. When I announced my retirement plans in October last year, I made it a priority to collaborate closely with our board for a smooth transition for my successor. Over the next couple of months, I will work with Manny and the F5 executive team to ensure a seamless handover of responsibilities before I take on the role of Non-Executive Chairman of the F5 board. Al Higginson, our Non-Executive Chairman for the past 11 years, will become the Lead Independent Director. I am confident that Manny's grasp of technology trends, strategic vision, operational experience, and cultural alignment with F5 values will ensure a bright future for the company. Now, let’s move on to our Q2 performance and expectations for Q3 and beyond. Overall, I was pleased with our Q2 results. Sales in the Americas region showed strong double-digit year-over-year bookings growth, meeting their internal forecasts. Notably, sales from deals over a million dollars in Q2 rose significantly from Q1, contributing to the robust performance in the Americas region. The EMEA region saw year-over-year sales booking growth but not as strong as in prior quarters and fell short of our internal expectations. APAC sales were also below projections, with Japan slightly exceeding our forecast. Our services business performed well, generating solid results and profitability, along with a healthy increase in deferred revenue, now around $721 million, a 6% sequential increase, which is promising for future business. From the software perspective, recent industry analyst reports indicate that we are a clear market leader in the virtual edition ADC market, thanks to our capability to offer solutions as virtual software across major hypervisors and unique orchestration functionality in BIG IQ, aiding customers in transitioning to software-defined data centers and NFV architectures. Additionally, a combination of GBB pricing, virtual ADC sales, and a strong attach rate of software modules continues to fuel our software growth. We achieved several large project wins with our security solutions in the last quarter. In our Q1 call three months ago, I shared that we won a significant AFM Gi firewall project with a Tier 1 service provider in North America, which is now in production. We received additional orders last quarter as the customer expands the Gi firewall solution within their network, and we anticipate ongoing business from this project throughout this fiscal year and into fiscal 2016. We also aim to replicate our success in the broader service provider market. We firmly believe our security business will be a key growth driver, with strong demand for our expanding portfolio of security solutions as customers shift to hybrid architectures, utilizing applications both on-premise and in the cloud. As you may remember, we launched our Silverline hybrid application strategy last November, which included our subscription-based DDoS service and anti-malware and phishing protection service. Our Silverline services platform was recently enhanced with our industry-leading WAF capabilities. This addition to F5 Silverline’s cloud-based application services platform is built on our award-winning ASM solution, offering customers leading WAF services in both on-premise and subscription-based cloud options. This new cloud offering ensures ease and speed of deployment, allowing organizations to incorporate cloud resources confidently while safeguarding applications and data from increasingly sophisticated security attacks, risks, and vulnerabilities. I was pleased with our progress in strategic initiatives in the service provider market last quarter. At Mobile World Congress, we showcased NFV solutions that support and secure service provider networks. Sales in this market were robust last quarter, achieving record high sales bookings, particularly in the Americas region, which had strong wins with Tier 1 service providers and several competitive victories in the cable sector. We had a number of successful competitive replacements last quarter, including the Gi firewall project mentioned earlier, along with significant wins in traffic to LTE solutions and license upgrades as LTE traffic grew within the installed base. The Gi consolidation traffic steering optimization also remains a strong driver in the service provider market. As noted last quarter, our hybrid application services based on our Synthesis architecture and Silverline cloud services are resonating well with our customers and partners. This strategy, along with the strength of our partner ecosystem in areas like SPN, positions F5 strategically as customers pursue competitive advantages and agility with new technology architectures. Furthermore, our portfolio of application products and cloud services is expanding rapidly, broadening our addressable market and increasing the variety of revenue streams for our sales force and partner channel. Concerning our outlook, Andy indicated we anticipate both sequential and year-over-year growth this quarter. Although we face potential headwinds from currency fluctuations in some regions, especially EMEA, I was encouraged by the positive rebound in revenue from million-dollar-plus deals, and I maintain that the fundamental drivers of our business are solid. We are committed to growth through investments in headcount and infrastructure while maintaining strong operating margins. I believe our existing product portfolio, hybrid application services strategy, and product roadmap align with customer and market trends, which are critical for leveraging these trends. In conclusion, I want to thank the entire F5 team, our partners, and customers for their support last quarter. Before we move to the Q&A session, I’ll hand it over to Manny to share his thoughts on F5’s opportunities going forward and discuss our strategic initiatives briefly.

Thank you, John. Before I say a few words on our vision and strategy, I would like to say that this is a very exciting time to be part of F5 and when I look across the company, I see a collaborative and productive team all aligned to the common goal of providing fast, secure, and available applications to anyone at any time on any device. That alignment and strategy and purpose is a testament to the company you built and the culture of innovation and respect you champion. Our leadership team, the Board and I, thank you for your dedication and commitment to excellence. We have something truly special here and I am honored to be given the opportunity to lead it into its next era. Regarding our vision, over the past years, F5 has evolved beyond the traditional data center routes to include a robust hybrid products and services portfolio including scale-out virtual editions, born-in-the-cloud products, and as-a-service solutions, all complementing our market-leading ADC technology. In addition, our innovative approach to protecting applications has made F5 a logical addition to many companies’ security posture. And lastly, our broadened ecosystem of technology partners will help us deliver our synthesis architecture to meet the ever-increasing SDN, NFV cloud, and security applications opportunities. In partnership with our leadership team, we will continue to evolve the company to ensure F5 can deliver application services in the way that makes the most business sense to our customers, whether that’s on-premise, in the cloud or on-demand, and always with the confidence that F5 is defending those applications. Lastly, our most important asset is our people. I will lead in a collaborative, transparent, and respectful way. In my first month as CEO, I’m dedicated to listening to our employees to hear what motivates them and to hear about their ideas on how to make F5 even a better place to work and serve our customers. I am excited to get started in this new role and I want to express my gratitude to John and the board for their vote of confidence. I will turn the call over for Q&A.

Thank you, and my congratulations to you Manny and thanks, John for all the great years. The questions I have, first, I just wanted to get a sense of, Andy maybe for you, linearity in the quarter. And then secondly, maybe for Manny, I know soft ADCs are not a big percentage of sales today. You just – virtual ADCs that you do refer to them just now, if the market pivots faster than expected to virtual ADCs, how do you see that affecting F5’s business and particularly the model?

Yeah, so first on the linearity, Jason, so it was more back-end loaded than we normally see in a Q3, but it wasn’t like a record, right. Really more telling was my comments on how near the end of the quarter, particularly in EMEA, APAC, and Latin America, we saw sales kind of drop off and that’s what has led us to a deeper look around the foreign currency elements of this, which we think are tied there. We’ve been talking with the sales teams, looking at specific deals where we think that was an impact and that’s really how the quarter laid out linearity-wise and has led us to this look at the foreign currency and a little bit of a cautious approach around that.

Yeah, let me just add some to virtual ADCs. So actually, we see this as being just complementary. We are seeing our virtual ADCs grow at a nice clip over the last couple of quarters and really over the last couple of years, but what we are seeing are two trends. One is that new applications are getting virtual ADCs, meaning in today’s architecture where either applications are moving to the cloud or they are moving to a much more software-defined data center, we are seeing those virtual ADCs take over. However, in those same instances, customers are looking for traditional hardware solutions in what we tend to call internally a two-tier architecture, meaning the exterior tier of the data center is usually hardware and in that level, we provide services with our custom-built hardware that provides high throughput, high performance. And then we apply virtual, if you will, ADCs at the application layer on the back-end of the tier. So we think it’s actually complementary. We think that to succeed in the market, you need both the hardware components and the software components working in tandem, providing both on-prem and off-prem solutions.

So you don’t see any cannibalization or ASP pressure in the business from it?

No, not at the current time, not at all.

Thank you.

Next question?

Hi, thank you, guys. John, I guess the first question for you, the strength in the service provider vertical, you mentioned North America. Was this again you starting to see the benefit of the security win you talked about? Can you just maybe provide a little more insight into just sort of the service provider trends by geography?

Yes. In service provider North America, it was across the board actually and all the tier 1s and I mentioned competitive wins in the cable company. So yes, security was a big factor, so was traffic steering, Gi consolidation. It was a pretty well-rounded quarter there. Sales in APAC weren’t quite strong, we had a very difficult comparison from a year ago where they had very significant growth. Same in Japan, it was a little bit late again with a very, very big win from one of the Japanese tier 1s last year. So that was doing a little bit. I don't actually have the information on EMEA. I think it was…

EMEA was relatively flat, they came in line with where we expected.

And then maybe just as a quick follow-up, just on your GBB program, can you give us a sense where we are, what sorts of attach rates are you getting? Do you think you’re past sort of the sweet spot of the acceleration or the momentum you saw last year? Just any help there would be highly appreciated.

Absolutely. GBB was interesting last quarter, in a sense that, well, first of all, a great majority is still going to best. Actually, I think it may even be a record percentage going to best, actually either went for better or best. It was as much as 80% actually. Interestingly enough, it was very solid in the Americas. In North America, in particular, it was actually very solid with pretty significant growth. We did see a little bit of deceleration in APAC and EMEA, which is actually somewhat counterintuitive, because they were slower to pick up the GBB process. I actually view that as good news, because we think, first of all, that’s not a trend that will continue because there is a lot of runway in EMEA and APAC and it was probably linked to the exchange issue, the foreign currency issue which was the bigger picture with the business. So very happy with what happened in North America, and let me say, with still significant revenue and very material part of the product revenue.

Excellent. Thank you, guys. I will step back in the queue.

Hi. Thanks very much guys. I wanted to follow up on the currency discussion, I guess I'm trying to get a better handle, any sense for how much of an impact you guys might have felt because of currency this quarter, how much did currency factor into your guidance for the next quarter? And then can you remind us how much of the business is US dollar or US dollar linked? And to the extent that you see pressure, does that wind up kind of falling through to F5? Is that more felt at the channel level? Any more flavor on the whole currency issue would be great? Thanks.

This is John. We are working to engage face-to-face or via video with our sales management in Latin America and EMEA and really delve into the matter. It's challenging to provide a specific number for EMEA. The currency fluctuations create issues, particularly for our VAR channel, which can lead to mistakes in order processing that result in losses while the end-user customer pays for the order. This hesitation was evident in South America, and we expect similar issues in EMEA. However, it’s too early to give you a concrete number. Based on what we observed at the end of the quarter regarding the decline, which is rare for those regions, we believe it must be related to foreign currency fluctuations, specifically the exchange rate.

Got it. And then, any sense for how much that is incorporated into the next quarter's guidance?

Well, hopefully adequately, that's what we try to do.

Let me ask you this way. What percentage of the deals that you see do you think the currency issue kind of rears up in?

It's challenging to determine, but when we encounter similar macro issues in the past, we typically revert to examining close rate percentages. We aim to adopt a conservative yet realistic close rate.

Got it, okay. Thank you.

Thanks.

Great, thanks very much. I wanted to ask about sales taxes for bundles like the Good, Better, Best. If those can be used to somehow outgrow the overall growth rate of the ADC market and what do you think, what's your current view on what the growth rate of the ADC market is and if you could just talk about how do you use the penetration of Good, Better, Best, as you try to outgrow that overall number?

So Michael, this is Manny, let me try to answer that question. So, yeah, we believe that GBB is transforming the ADC market, and the growth rate of the overall ADC market and the rationale for that is because, what we are doing is consolidating a set of services; layer four through seven services inside a product. The traditional ADC product itself was predominantly started out being a load balancer in the early days, if you go back a decade or so ago and since then, we've incorporated into that product, firewall technology, Secure Web Gate technologies, service provider technologies, the list goes on and on, that's part of the value proposition if they are a traffic management operating system or big IP that we bring to the market. So by looking at that, we think the addressable market of our solutions is about a $12 billion opportunity for us. That's what we talked about at the Analyst Conference last November, we are tracking to that, and we monitor that very closely. If you look at just the ADC market, right, and the old definition, that would be about a $4 billion market, so we think we've added to the new definition, approximately $8 billion of incremental TAM.

And do you have a view just on the growth rate of the traditional ADC market? I guess the industry analysts are probably counting it, but are there any of those numbers that you endorse?

This is John. We're not questioning that, as we are focused on expanding into a variety of markets, not just security. The more successful we are in security, which we feel positive about, the faster we can enter these rapidly growing markets. I could provide you with a figure on security, but I prefer not to, as it might be misleading considering we need it to become a larger portion of our business. It is growing, and that’s part of our strategy. Instead of presenting a single number for the ADC market, keep in mind that we are utilizing ADC to access other markets, particularly fast-paced ones like mobile traffic and security.

Excellent. Thanks for allowing the question and congratulations to both of you.

Thanks.

Thank you for taking the questions. I want to discuss the million dollar deals, which you mentioned increased significantly in the quarter. That's positive. What do you expect as we approach the next quarter? Will that momentum continue? Do the components of your guidance include smaller deals? What are your thoughts on this?

This is John, I think what we saw there was, I think we got proved right. In last quarter's call, we said we believe that the reduction was due to the Q4 push, emptying the pipeline, and I think we're back to normality in the million dollar deals, and obviously, time will tell that, but that's how we feel when we look at the pipeline and listen to the quarterly business reviews on the forecast by the sales force. But let me remind you because I'm not going to be here is that Q1 next year, I think you're going to see a very similar scenario.

Okay. And just as a follow-up or maybe a second question, the breakout between product revenue and service revenue, product has been sort of decelerating with service revenue growing quite rapidly. Do you see that dynamic continuing? What's the shift or the sales model shift? Is that going to continue to push towards service model and subscription revenue? Just some thoughts on the growth of product revenue would be great.

When we consider the balance between product and service, I believe that services typically lag behind product growth. We are currently experiencing significant growth in services following last year's impressive product growth. If we do not see a renewed acceleration in product sales, we may notice a slowdown in service growth over time. That's the situation we're facing.

Product revenue acceleration will always be a primary financial objective, as the rest of the business appears to be in good shape regarding profit and other factors. The two main focus areas for growth are service providers and security, and it’s essential to ensure both are on track. There will also be additional growth areas, particularly in subscriptions. Although it may take time before we notice significant growth in that area, once it begins, it tends to be sustainable. Our top priority remains on product revenue growth; simultaneously, we are developing another channel through subscription services in Silverline to secure solid recurring revenue at both product and service levels.

For clarification, our subscription revenue from the Silverline service is included in our product revenue. An important metric we will start monitoring more closely is deferred revenue and its growth, as it indicates future revenue potential. We will discuss this further in upcoming quarters as it becomes more relevant.

Okay, great. Thanks.

Yeah, hi guys, thanks for taking my question. I just wanted to follow-up on the currency question, George had asked you guys what the dollar rate or dollar exposure is versus foreign currency, and I think you guys price in local currency external for the US, but just wanted to double-check that and then have a follow-up.

Yeah, so, actually, almost all of our sales are in US dollar, right, and that goes to the distributor and then converts to local currency at that point, right, which is why John was taking about you know, we work with the channel on these currency issues and historically taught to address them on a deal-by-deal basis. So far with what we’re hearing, we think that’s how it’s going to continue but we’ll see.

Are you considering increasing price declines in dollars to offset local currency fluctuations in regions significantly affected, such as Brazil and Russia, or have you not yet taken that step?

We haven’t lowered our pricing in the past and likely won't in the future. Instead, we plan to manage it through our discounting process on a case-by-case basis, collaborating with our channel partners as needed to ensure mutual success.

I would like to follow up on the managed or consulting services. You mentioned that there has been an increasing demand for these services. Can you provide any insight or quantify how this aspect of your services is growing? I believe it is still on an upward trajectory.

This is Julian. That part of the services business is growing slightly faster than the maintenance support business, but over the course of the last 18 months, we’ve been employing strategies of working with our sales partners and expanding their capabilities to the point that we sub-contract to those people as well, and also providing more of that consulting service remotely rather than going to site all the time. Always focused on product sales, but at the same time, trying to maintain better margins, which is what we’ve done over the past year.

Thank you very much, and I would like to extend my congratulations to those who have spoken before me. I look forward to working with you, Manny, and I’ll miss working with you, John. Could I ask about the product revenue growth? We have been monitoring this for many years and asking about it each quarter. It seems like it may be flat or declining again in the next quarter. If we assume that the currency stabilizes at these levels, how long do you think it will take for product revenue to start increasing again?

This is John. I want to address the situation by pointing out that last quarter in America, we experienced a strong rebound not just in million-dollar deals but in actual sales as well. If we hadn't faced currency issues, we might not be discussing this at all. It's important for us to maintain our focus on developing technology and security and the major opportunities we see ahead, ensuring we execute effectively on areas like the ACE opportunity, which we still believe has potential. If several deals come together this quarter, we expect to see positive results. That's our priority, although we acknowledge there are some macroeconomic headwinds to consider.

And what I will add to that is, we are continuing our innovation cycle and we will see specifically coming out later this quarter, our next release of technology and products into the market segment. So actually, it’s the quarter after, I apologize, Q4 that you will see that innovation come out. So, you will expect to see from us continuing to add innovation on two releases, predominantly a year, and that will continue to build TAM for us in new products in the market.

Okay. Well, that leads me into a new direction, I guess. I mean, do you think it is possible that some of the revenue that you might have liked to have seen in the March quarter and the June quarter did not arrive for some other reason and maybe that’s because they are expecting some of these product refreshes or maybe it’s just the tough comps or what have you? Are there other things going on possibly beyond the currency?

I don’t think so, this is John. First of all, our sales management in North America and EMEA this week expressed optimism about our competitive position, so we don’t see any issues at this time. We believe we have a strong area here and will continue to push forward, focusing on the solutions and innovation that Manny mentioned, which will contribute to product revenue.

To clarify, most of the innovation we are discussing is not related to physical hardware; it primarily involves software innovation. This allows customers to upgrade, particularly as we enhance our support capabilities. We provide the opportunity to transition through the latest software cycle, so we are not at a disadvantage for lacking technology today. When the additional software features are released, customers will be able to upgrade.

Thank you, gentlemen.

Thank you.

Thank you for taking my question, and congratulations to John and Manny. I want to ask about the end of the quarter and the softness in performance. You mentioned currency effects, but did you notice any impact from competition? There are some competitors who seem to be struggling; could that have contributed to the weakness at the end of the quarter? That's my first question. My second question is regarding product and service growth. John, could you clarify the composition of the services for new or serviced maintenance contracts? Are they primarily from foreign clients? I'm asking because I'm wondering if foreign buyers might be delaying upgrades or new purchases and sticking with their current solutions due to currency fluctuations. Have you considered that?

Yeah. Let Julian answer the services thing, because I think definitely the way you have asked the question is about the situation, and then we will talk about the competitors.

So on the services, maintenance, renewals, we had a strong quarter across the globe. The proportions really mirror the product revenue portions from the past that we have talked about, roughly just under 60% North America and the rest of the world the rest. EMEA and North America were our two outstanding performers; there are really no effects whatsoever in this regard.

And Rohit, just to add around the market share, so over the course of last year, we grew market share and we felt really good about that taking our leadership, while maintaining leadership position in the total market, we are also taking a leadership position in the software-only market. We anticipate this quarter that we will gain market share across the board. Our competitors continue to be Citrix, A10, Radware, those are the primary competitors we see out there. And our selling motions, our win rate in the field, everything is favorable, very favorable, so we expect another year of continuing to gain market share.

Okay. Can I just ask a quick follow-up, Manny, you didn’t seem like when you had your part of the presentation that there was going to be anything different, but if John wasn’t in the room, what would you change?

Oh, John is in the room – oh, he is not there. I think for us, really I have taken this question a couple of times, where I think the focus is going to be short-termish, first of all, the transition. There is no question about – we’re going through a quarter here, where we are transitioning, we want to make sure that we continue to execute our financial model as well as all of our customer commitments. But what we are aggressively also working internally is our FY16 and beyond strategy. And that’s how we’re going to balance not only the short-term opportunities we have but also the long-term opportunities to be able to succeed. And as we evaluate that, you’ll see us rolling that out at the Analyst Day in November just like we always do what our strategy is. There are some areas there that we’re going to double-down and accelerate, some of those are probably pretty obvious, things like security, which we have a lot of traction and there are other areas where we might consider pulling back a little bit on the investments just to capitalize on those new areas. And that’s the area that we’ll be evaluating over the course of the next quarter or two.

Thanks, Manny and John. I appreciate it.

Thank you.

Brian, this is John Eldridge. We’re going to take two more calls and then wrap it up.

All right, thanks guys. I recognize you’ve been asked the question six ways to Sunday, so that said, going back to currency for one minute, and I suspect it’s probably impossible to tell, but John, Andy, Manny, have you seen with respect to US-based customers, larger customers who do business overseas, where they too have been impacted perhaps to one extent or another in terms of a decrease in revenue over the last nine months of depreciation of the dollar? Have you seen any sign that they’re cutting back on their IT purchases and historically it’s been the case, the first thing that gets cut is networking, are there any signs of that? And then on the Gi firewall deal that you all called out in terms of the dollar contribution, can you give us some sense of the magnitude and I heard you say that you expect this to continue through ’16, but I guess I’m trying to get a sense of the concentration risk from that one deal?

Let me address that. In the previous call, I mentioned a few transactions exceeding a million dollars. We also noted another transaction occurring this quarter valued in the millions. We anticipate this type of activity, but keep in mind this is a rollout and not something we expect to see consistently throughout the fiscal year. I’m not committing to seeing it every quarter, but we do foresee similar transactions as we implement the Gi firewall across the network. Additionally, we believe this will continue into 2016. We don't see any concentration risk; in fact, it's nearly the opposite. Our primary goal is to ensure it functions effectively, and we’re quite pleased with how it has transitioned into production, as well as our plans to replicate this in other areas.

Let me just add something to that. Although we talked about that one transaction, we’ve also seen other Gi firewall deals that we’ve won, they tend to be much more in the software space, NFV-type projects from that implementation point of view and those are material also in size. So it’s not concentrated as per one account. We’re seeing that traction across various different service providers, some which are going to hardware appliances and some which are going to the software architectures.

Sorry. To your initial question about US companies being impacted in some way if they do multinational business, where we would hear that is through the channel at our sales force that services those accounts and even anecdotally, we’re not getting any indication of that that would give us concern there with the US companies doing business overseas.

So, all the near-term we’ve been seeing, you’d attribute to the dollar impact on overseas business, not US?

Yeah. And then on the flip side, you look at EPS and saw the benefit in our EPS from foreign currency.

All right. One quick follow-up, Andy I trust, I know you’re saying that the virtual editions are incremental, not cannibalistic, but I also if I recall historically when you said on the issue that virtual editions go out about 80% of the price of a hardware with a wash to the bottom line, that it’s a deal better or worse, does that still hold?

Yeah. I mean what we’ve seen historically, if you look at how we price the virtual editions, it’s roughly $12,000, which is 80% of our entry-level box, which is about $15,000, which has 20% margin. So, the entry-level, it's kind of a wash, but what we’ve seen to-date is that those deals tend to be larger because they choose to go with a much more horizontal type approach, which pushes them towards many more instances and that’s what we’ve seen. So, not saying that it won’t change as things evolve, but at least today that's where we’re at.

I think just to add some additional context to that, this is Manny, the way to think about it is when we tend to sell the virtual editions, they tend to go out one per application. Sometimes when the hardware is sold, it's many applications from one appliance. So, you’re seeing it picked up in volume, which is Andy’s point versus concentration at the appliance level. So it tends to be almost a wash.

Thanks, guys.

Thanks so much. Let me add my congratulations to both Manny and John. Two quick questions. John, just on the currency issue, just wanted to get a flavor, when you are seeing these issues, are they coming in the form of a lower deal size? Are the deals getting pushed out? Any color over there would be helpful. And then on Cisco ACE, I know you mentioned it briefly, but are you still seeing a lot of opportunities out there, or is this starting to get a little bit mature since you have been sort of attacking that installed base for well over a year now? Thanks.

Yeah, so on the deal size, we have seen some of that, and again, it’s anecdotal in the sense, it’s coming from sales management as they are looking and thinking, what happens here, we forecast a number and that towards the end, we missed them, we don’t often do that. And then when you look at some of the actual orders, especially towards the end of the fiscal quarter, I should say, we did see some reduction on add-ons coming. So we did see some of that happening. In other words, the customer really needs the basic optimization and steering, but maybe doesn’t opt for an additional module, it was a bit of that one or again, have to actually come up with a specific number on that, but we did see some of that. And then ACE, ACE, we think we’ve still got a very big opportunity there. I mentioned I think just briefly during the call that when we went through the America’s QVR this week on Monday, we went through in detail and it was a bunch of fairly big transactions that we’re forecasting to close our ACE opportunities. And then of course, remember that once we do that, if we get a big transaction, it tends to mean it’s a bigger company, we sell security, we sell more add-ons, we sell more into the account and moved up, very good example of that. So yeah, I think it’s still a very, very good opportunity for us and we are focused on it and that’s why we keep measuring it and looking at it each quarter.

Got it. Thank you.

Thank you.

All right. Well, thank you all for joining us for this call and rest assured, we are going to keep our heads down and do our best to bring in a good quarter. We will talk to you all again at the end of Q3.