F5, Inc. (FFIV) Q2 2013 Earnings Report, Transcript and Summary

John Eldridge Andy Reinland - Chief Finance Officer and Executive Vice President John McAdam - Chief Executive Officer, President and Executive Director Manuel F. Rivelo - Executive Vice President of Security and Strategic Solutions Karl D. Triebes - Chief Technology Officer and Executive Vice President of Product Development Dan Matte - Executive Vice President of Marketing and Business Development

Jason Ader - William Blair & Company L.L.C., Research Division Brian John White - Topeka Capital Markets Inc., Research Division Brian Marshall - ISI Group Inc., Research Division George C. Notter - Jefferies & Company, Inc., Research Division Scott Thompson - FBR Capital Markets & Co., Research Division Rohit N. Chopra - Wedbush Securities Inc., Research Division Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division Ittai Kidron - Oppenheimer & Co. Inc., Research Division Amitabh Passi - UBS Investment Bank, Research Division Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

Good afternoon, and welcome to the F5 Network's Second Quarter Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded. If anyone has any objections, please disconnect at this time. I now would like to turn the call over to Mr. John Eldridge, Director of Investor Relations. Sir, you may begin.

Thank you, Sharon. Welcome to our conference call for the second quarter of fiscal 2013. The speakers on today's call are John McAdam, President and Chief Executive Officer; and Andy Reinland, Chief Financial Officer and Executive VP, Finance. Other members of our executive team are also with us to answer questions following their prepared comments. If you have questions after 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 at f5.com. In addition, you can access an archive version of today's live webcast from the Investor Relations Events Calendar page of our website through July 24 from 4:30 p.m. today until midnight Pacific Time, April 25. You can also listen to a telephone replay at (800) 695-3640 or (402) 220-0318. 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 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. Before we begin, I want to remind you 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. In line with the updated guidance we've provided on April 4, revenue for the second quarter of fiscal 2013 was $350.2 million, down 4% sequentially and up 3% year-over-year. GAAP EPS was $0.80 per share compared to $0.88 per share in Q1 and $0.86 per share in Q2 of last year. Non-GAAP EPS was $1.07 per share compared to $1.14 per share in the prior quarter and $1.09 per share in the second quarter of fiscal 2012. Product revenue of $185.1 million represented 53% of total revenue, down 10% from Q2 2012. Service revenue increased 23% from a year ago to $165.1 million, accounting for 47% of revenue. Revenue from our Application Delivery Networking business was $345.1 million, and revenue from our ARX file virtualization business was $5.1 million. Book-to-bill for the quarter was equal to 1. Revenue from the Americas represented 54% of total revenue, down 4% from Q2 2012. EMEA contributed 23%, up 13% year-over-year. APAC accounted for 16% of revenue, a 21% year-over-year increase; and Japan, 6% of revenue, a 5% decline year-over-year. During Q2, the financial vertical equaled 23% of total sales. Technology represented 18% and telco accounted for 17%. U.S. federal government was 5% of sales, and total government accounted for 13%. 3 of our distributors each contributed more than 10% of revenue in Q2. Avnet Technologies accounted for 16.3%, Ingram accounted for 13.4% and Westcon accounted for 11.1%. GAAP gross margin in Q2 was 82.8%. Our non-GAAP gross margin was 83.9%. GAAP operating expenses were $197.5 million. Non-GAAP operating expenses were $172.7 million. Our GAAP operating margin in Q2 was 26.4%. Non-GAAP operating margin was 34.6%. Our GAAP effective tax rate for the quarter was 33%, and our non-GAAP effective tax rate was 31.2%. On the balance sheet, below our initial target, but in line with our revenue results, cash flow from operations was $80.7 million, and we ended the quarter with $1.19 billion in cash and investments. DSO at the end of Q2 was 50 days. Inventories at quarter end were $18 million. Deferred revenue grew to $490.7 million, up 19% from a year ago. We repurchased 508,000 shares of our common stock in Q2 at an average price of $98.31 per share. Headcount at quarter end was approximately 3,155 employees, a net increase of 30 from the prior quarter. Now for our Q3 outlook. As John will discuss in more detail, F5's results for the second quarter of fiscal 2013 clearly reflected the challenges of doing business in a difficult economic environment. Budgets in general appeared to be more constricted than we had been seeing, which resulted in bill slippage and longer sales cycles, particularly in the telco vertical, as well as U.S. federal sales. On a more positive note, we are seeing early indications that our new product rollouts are getting traction in the marketplace and anticipate momentum to build as we release the 5000 and the 7000 Series. We are seeing continued strong growth for F5 in the security space, including a very successful first quarter selling of our advanced firewall module. We are committed to continue investing in technology that aligns with market trends and leads the industry in performance, scalability and ease-of-use. Our top priority remains reaccelerating product revenue growth and, at the same time, maintaining world-class profitability. For the third quarter, we have set a revenue target in the range of $355 million to $365 million. We expect GAAP gross margin in the 83% range, including approximately $3 million of stock-based compensation expense and $1 million in amortization of purchased intangible assets. During Q3, GAAP operating expenses are expected to be in the range of $197 million to $204 million, including approximately $24.5 million of stock-based compensation expense. We are forecasting an effective tax rate of 36%, and we expect a non-GAAP effective tax rate of 34%. Our GAAP EPS target is $0.80 to $0.83 per diluted share. Our non-GAAP EPS target is $1.06 to $1.09 per diluted share. We plan to increase our headcount by 50 to 100 employees during the quarter. We estimate DSOs will be at or around 50 days. We expect inventory levels within the range of $18 million to $20 million. And we expect cash flow from operations in excess of $110 million. With that, I will turn the call over to John McAdam.

Thanks, Andy, and good afternoon, everyone. As I mentioned in the announcement of our preliminary Q2 results, clearly, our revenue was well below our expectation and internal forecast. During the quarter, we experienced difficulties in closing certain forecasted deals, as customers hesitated to approve budgets and release purchase orders, causing us to adjust our internal forecast late in the quarter. The slowdown in orders was pronounced in North America and, to a lesser extent, EMEA; while Asia Pacific and Japan came in roughly as planned. In particular, we experienced significant weakness in our telco vertical, where sales were down significantly on both a year-over-year and sequential basis, as funding for several projects was delayed. Government sales were also down year-over-year, likely impacted to some degree by the U.S. government sequester. We also experienced a fairly sizable year-over-year drop in orders greater than $1 million in size, a trend that has been ongoing since Q3 of last year. We have looked very closely at the reasons for the shortfall in orders -- of orders in Q2. Our overall view is that most of the shortfall was due to either budget constraints, project timescale being pushed out to later dates or delays in decision-making as customers transition to F5's new range of products we have introduced over the last couple of quarters. On a positive note, we saw some very encouraging results in Q2 in several areas. We added 2 new Fortune 500 customers and saw a reasonable growth in our Enterprise business, especially in the financial vertical, which was our strongest vertical in Q2 at 23% of overall sales bookings. Sales of our security products were up significantly in Q2. We had record sales of our application security module, ASM, and a strong start in sales of our new Advanced Firewall Manager, AFM. We started shipping AFM in mid-February and sold AFM solutions to over 50 customers, with most of these sales occurring in the month of March. With the introduction of AFM, F5 provides the world's fastest and most scalable Application Delivery Firewall solution. F5's firewall solution is the first in the industry to unify a network firewall with traffic management, application security, user access management and DNS security capabilities, all within an intelligent services framework. We also saw some excellent wins with our access solution, Access Policy Manager, APM. These wins included very large implementation in Fortune 100 companies, where APM is being used to replace existing competitor technologies. The key advantages we offer with the APM includes superior performance and scalability, as well as the extensibility of our access usage modules, including wide VDI support, SSL remote access and simul functionality. From a platform perspective, we saw a strong traction with our new BIG-IP 4200 platform, which we introduced in Q1. This should bode well for future sales of the new entry-level BIG-IP 2000 Series platforms and the new high-end BIG-IP 10000 Series platforms, both of which started shipping during last quarter. We also achieved some excellent sales win, replacing Cisco ACE products in large customer accounts, and the pipeline of similar opportunity continues to grow rapidly. We are starting to see a clear pattern with the ACE opportunities, where not only do we replace the existing solutions, but also provide customers additional functionality like DDoS prevention and application security solutions. Once again, our Services business was solidly profitable on year-over-year growth of 23%. In Q2, we completed the acquisition of LineRate Systems, an early-stage software company based near Boulder. The LineRate Systems technology focuses on solutions that combine open-source tools and software with proprietary technology, enabling web application developers to integrate network services directly into their applications. The acquisition of LineRate aligns positively with emerging industry trends. Software-defined networking and cloud computing are driving enterprise customers and service providers to reassess how new network and applications are created, deployed and managed. F5 is the market leader in the delivery of flexible infrastructure to support intelligent network and application services through our ADC platform. The acquisition of LineRate is a strategic fit within our vision, and this technology will extend our capabilities and enable us to further expand our market opportunities. From an overall roadmap perspective, we have a number of near-term deliverables, which will increase our overall technology leadership, our competitive advantage and to expand growth opportunities in key markets, including security, service providers, cloud-based architectures and new-generation data centers. Our goal is to start shipping both the BIG-IP 5000 and 7000 Series platforms in this coming quarter. These new platforms will be positioned as our new mid-range BIG-IP appliances, offering significant price performance improvements over our existing mid-range solutions. This will complete the comprehensive product refresh that we started in fiscal 2013. We also plan to introduce another release of TMOS this quarter, known internally as corona [ph]. The TMOS corona [ph] release includes our new management platform, BIG-IQ. BIG-IQ release 1 includes support for firewall manager and cloud manager. The firewall manager functionality provides enterprises and service providers with a comprehensive management capability to manage large firewall configuration policies. This will support both hardware and software modules, enabling private and public security solutions. Cloud manager delivers sophisticated management functionality designed to optimize cloud-based architecture and includes the following features: Cloud bridging, to enable private and public clouds to communicate through a secure and optimized connection; Cloud bursting, to expand the resources of our private cloud with resources from a public cloud to address transient work spikes; and cloud application tiering, to host multi-tiered applications in different clouds. For example, a web server can be hosted in a public cloud, and the database server can be hosted in a private cloud, keeping control of sensitive data. BIG-IQ will also offer performance and help monitoring functionalities, as well as public API interfaces. As far as the outlook is concerned, Andy indicated we expect to see sequential growth this quarter. We clearly experienced a very cautious spending environment last quarter. However, looking forward, we believe we continue to have significant revenue growth opportunities. With the introduction of the BIG-IP 5000 and 7000 Series, we will have delivered a comprehensive refresh of an entire platform product family, with significant price performance advantages, further increasing our overall competitive advantage. These new products should enable our sales force to aggressively exploit opportunities with the Cisco ACE installed base and offer customers a full suite of solutions available on our new platforms. We continue to make steady progress in our sales of software-only and hybrid software system solutions. We expect this momentum to continue with the expansion of our industry-leading range of hypervisor support. These solutions can now support customers' data centers and cloud environments when -- with unprecedented performance. Clearly, we were very disappointed with the results in the service provider market last quarter. However, we have a strong pipeline and are convinced that we have a winning strategy with our intelligent services platforms that can consolidate complex traffic steering, carrier-grade NAT solutions, application and network firewall protection and our policy enforcement module. Also, we are seeing good success and initial project wins with our Traffix Systems Diameter solutions for LTE deployments. And over the past year, we have closed wins with more than 25 operators worldwide. Perhaps our best opportunity for future growth comes from our unique security solution portfolio. In particular, our new Application Delivery Firewall solution provides our enterprise and service provider customers the ability to integrate essential security capabilities and protect their applications, data and users. As I mentioned earlier, F5's Application Delivery Firewall solution is the first in the industry to combine DDoS protection, the world's fastest network firewall application security, access management and DNS security, as well as comprehensive traffic management functionality. I remain very excited about the future prospects for F5. I would like to take this opportunity to thank the F5 team and our partners and look forward to continued support for the rest of the year. So with that, we'll hand the call over for Q&A.

[Operator Instructions] Our first question comes from Jason Ader of William Blair. Jason Ader - William Blair & Company L.L.C., Research Division: I have 1 clarification and then 1 question. And the clarification is, when you guys talked about book-to-bill, Andy, is that total sales or just product book-to-bill? And then, secondly, could you talk about your thoughts on the services growth? It's still very strong, over 20%. But if I just kind of use the same cadence that we had from sequential December to March, it looks like it's going to, from a year-over-year growth standpoint, pretty closely -- or pretty soon get to kind of like mid-teens. So is that the right way to think about the services growth, or is there something else going on in services that could reaccelerate the sequential services growth?

Yes. So to the first part of your question, when we talked book-to-bill, for us, that is strictly product, strictly product, yes. And then, in terms of services, yes, you're right, we've long talked about that. But when you look at our Services business and the growth there, it does correlate to product, and we have seen the product grow slow, which is why it's so important for us, and our #1 priority is reaccelerating product revenue. And I think we're seeing that play out over a more elongated time. But there's nothing within Services a business itself that's still really high rates in terms of maintenance renewals. We're doing very well in the consulting area, actually, which we think is critical for us, in driving that reaccelerated product revenue growth. So nothing systemic there to worry about.

Our next question comes from Brian White of Topeka.

I'm just wondering if you feel like the product cycle year-over-year growth has bottomed in the March quarter. It looks like it's down 10% year-over-year. Should we see an acceleration from this level?

Yes. Given the GAAP that we saw on our guidance versus the actual, we're going to be pretty cautious about talking medium to long term and really stick to the quarter guidance. Having said that, we do expect to see a driver -- a business driver coming now that we've effectively -- well, certainly with the 5000 and 7000 coming this quarter, we will effectively have completed the product refresh and see growth in that. Also, I -- as I mentioned in the list I was giving of drivers, I think security is definitely a big opportunity from a product growth perspective as well.

Okay. And just -- if I look back at March quarter, it's pretty amazing because there was never -- other than the second quarter of '09, there was never a March quarter that fell this much. So during the financial crisis it fell 7%. Here, we fell 4%. It begs the question, do you feel like we're in a recession or going into recession? I mean...

I think -- yes. I think we've really come down to 2 issues. The first issue is definitely macro. I'm not going to call it recession, but definitely macro issues. And we've seen that obviously with peers. But I think whatever is exaggerated with us is obviously the telco performance. And that's -- that was more project slipping. I mean, interestingly enough, we put a pretty strong start here in April, which is encouraging that we're only talking 3 weeks, remember, so -- but it's encouraging, especially in the telco vertical.

And our next question comes from Brian Marshall of ISI Group.

We've uncovered some social media guys that probably are migrating off sort of the ADC platforms and are doing this more from a home-grown or a open-source standpoint, that 437 [ph]. I guess, the question is, what makes you think that the telco guys can't do a 437 more from a software standpoint going forward? And basically, we're starting to see the early signs of this market kind of secularly moving away from us as opposed to just some cyclical impact from the order books. So would love some commentary there and a quick follow-up, if I could.

Yes. And we've alluded to that in the past -- sorry, fairly recent quarters, Brian, where we've seen a small number, and we're talking of a very small number of some of the larger web monster-type solution providers deciding to do their own. And Google's software has always been close to the poster child for that. But, yes, we've seen a very, very small number. Typically, the application mix tends to be more straightforward, and there tends to be a need to get to roll out apps very, very quickly in that type of environment. That's not the case in the service provider space, and it's certainly not the case in the enterprise either. So we don't see anything like the same threat there. Now having said that, remember, our strategy has been to take our ADC platform and continue to add solutions to it. So for example, we think our security solutions that we've added pretty rapidly and are seeing great success is a great counterbalance to that trend. But you're not just doing simple load balancing, you're doing much more complex either application optimization or security. And so, I mean, that's our strategy, and I feel pretty good about that.

Great. And really quickly, you mentioned that security was running [ph]. Could you break out the security revenues for us in the quarter...

It's just sort of hard to do that. I mean, we have examples. We've looked a number of wins, some of them approaching the million-dollar range, where -- I'll give you 1 example. One example is a large financial organization, U.S. organization, where our first entry into that actually was doing some Oracle optimization using iRules in areas like that, but it also allowed us to get our application security manager into the sale to actually replace and chucked out one of our major competitors -- our major competitor. So what do you call that? Is that security? Is it traffic steering? What is it? So it's so difficult to say. But when we look at the ASM modules -- and we don't give out just the software solutions. As I said, that was a record quarter, and we did get some view of the AFM, the application firewall we sense will lead to pretty big systems behind it. So that's, for me, the best information we can give you.

Our next question comes from George Notter of Jefferies. George C. Notter - Jefferies & Company, Inc., Research Division: I wanted to ask you about your referencing lumpiness in the service provider business. I guess, I was just curious about how many operators we're talking about, how many particular deals were involved, how big were those deals. I mean, any more flavor you could give us for that lumpiness would be great. And I guess, I'm just trying to understand maybe more root cause rather than just a general -- or is it more just a general broad-brush statement about service provider budgets and then timing of those being released. Any more flavor would be great.

Absolutely. And it's not a general broad-brush statement. Specifically, in North America, it was much more project-oriented. That's pretty important. And as I said, we think we've started a quarter in a pretty good light here. We're seeing some of these projects being released. It was very much that. Now we did see globally a downtick in service provider. We did see that. But mostly those are project oriented, we've said many times in the past that we don't really see a service provider linked completely to the CapEx thing. I mean, it's obviously to some degree, but it's much more project-oriented. And hopefully, last quarter was an anomaly. George C. Notter - Jefferies & Company, Inc., Research Division: Was this 3 providers, 5 providers? I mean, how many operators were involved here?

If you look at North America, we're talking Tier 1 type of providers.

Our next question comes from Scott Thompson of FBR Capital. Scott Thompson - FBR Capital Markets & Co., Research Division: There has been a little bit of talk with other security-type companies of carriers pushing them from a CapEx model to more of an OpEx-type purchasing model. Are guys getting any kind of pressure to do that kind of a transaction as well?

Not really. It's not something we've seen, and we have a number of ongoing type of discussions with service providers and security. But, no, we haven't seen that.

The only thing I would add, and this is Manny, to that comment is that we're seeing with some of the cloud providers who are going to more of a model, where they want to pay, if you will, by the bid or by the day, and those situations obviously, we're seeing it there. But that's more in the cloud provider, not the traditional telco. Scott Thompson - FBR Capital Markets & Co., Research Division: Okay. And carriers haven't approached you about virtualized platforms or network function virtualization or anything like that either, right?

Yes, that they are approaching us with, and we've been talking to them about that. Obviously, that's a big use case. They're all looking at that over the next -- over the horizon, I would say, the next -- I'd say 3 to 5 years. That's their intent to deploy. The great news is all of our software modules are supported across all the industry major hypervisors. So we think we're in a great position to capitalize on that, and we've been talking to various providers and network equipment providers also about our solutions there.

And that's why I took some time -- in my introduction, I talked about BIG-IQ. Pardon the pun here, but BIG-IQ is a really big deal in this environment because of its ability to optimize and move applications around the clouds around it within the data center private to public, et cetera, et cetera. Scott Thompson - FBR Capital Markets & Co., Research Division: All right. And then, one other quick question, if I may. The projects that are being released this quarter that are driving the strength in service provider, are those from the same service providers that drove the miss?

Oh, no. We're not linking products being released with the projects and service provider. It doesn't mean there is not an overlap, but that's all -- we're talking about projects coming to fruition and that could be with older products. It could be with new products. It's not linked to the actual product.

Our next question comes from Rohit Chopra of Wedbush.

Just a couple of questions. How do you know that there isn't a trade-down effect or a competition impacting the business? And the other part that I wanted to ask was, how do you know that the release of the 5000 and the 7000 won't cause another potential pause in the business, as people evaluate?

Yes. And obviously, on the latter part, there may be some element of that. I think we've taken that into account now when we gave our guidance. So that's possible. Having said that, the 2000 entry-level. The 10000, of course, are moving into the second quarter and it hopefully will benefit the way the 4200 did. So there, I think, is give-and-take there. On the first question regarding competition, one of the things we did say -- on our pre-announcement, we said we are seeing some more engagements with competition. There's no question about that, especially because of the ACE opportunity that -- obviously, everybody's looking at that, and we're seeing a little bit of a ramp-up there. But our competitive win rates, which we follow very, very closely, very closely. We look at revenue, we look at the number of engagements and we look at the win rate in both, and that's still very solid for us. And not only that, we're increasing our functionality. Security, we're doing really well in. Access, we're doing really well in. When we talk to the sales force -- and you can imagine we've had a laser focus in doing that, we basically are not hitting anything different from them. I mean, we're not dismissing competition. Don't get me wrong, but we don't see a significant change, and we absolutely -- when we look at the deals that slipped last quarter and didn't come to fruition, it's actually hard to find any that were competitive losses. In other words...

Any evidence of trade-downs, John?

What do you mean by trade-downs?

[indiscernible] higher-end products, and maybe they're looking...

Yes, I think there should be some of that. I think, definitely -- we are talking about pretty significant price performance advantages, the 2400 -- the VIPRION 2400, that's been incredibly successful, has probably increased, taken some of the low end of the higher end of the VIPRION. Does that make sense? So to some degree, yes. But the other side to that is the attach rate in software modules is going up. So there is a balance there, as -- okay, you're getting a better price performance from the products, but you can add more software modules to it. So that comes into play as well.

Yes. This is Karl by the way. I'm just going to add to that, Rohit, that we're also allowing more modules to run, in fact, all the modules down to the lowest end platforms. And so, we expect that to help drive software sales, and we have vCMP running on most of our appliances well now. So we'll expect that to extend -- we'll extend that. So we're adding more software services straight down the lineup.

Our next question comes from Ryan Bergan of Craig-Hallum.

I apologize if I missed this, but when you talked about service provider deals that slipped out of the last quarter into the current quarter, we're you also -- we're you addressing total deals that slipped including U.S. federal, or was that just a service provider comment?

Specifically, the comment was -- I was talking about service provider. I did say that -- and I'm going to repeat here, we're only in 3 weeks of the quarter, right? So I don't -- although it's important to us because we really do check our business weekly. We have seen a fairly good start across-the-board not just in service provider, but especially in service provider.

Would you characterize in these first 3 weeks -- and I understand it's early that you're seeing -- have you started to see any of those U.S. federal deals that slipped hit here in the June quarter?

You know what? I don't know if I know the answer to that, specifically.

Okay. And I understand that you only give guidance out for 1 quarter. But kind of give me some of your general thoughts on September quarter, U.S. federal with being in the fiscal year end. And do you see -- what kind of generalities do you see with the September quarter, the U.S. fed business this year versus maybe last year?

Yes. So with the federal business -- I mean, you're right. September quarter is the year end for government. And historically, for us, that's been a strong quarter and now it included our last Q4 in that comment. I probably won't give you any color on the coming September quarter. We'll do that on our next call, but it will be the end of the year for the federal government. So we'll see on that.

Okay. And then one more for me. It looks like the technology segment was down year-on-year again. I'm just wondering if you feel like you've seen a bottom in that vertical yet, or if you feel like it's being impacted a bit from the macro here and that it's still maybe too soon to call the bottom on that vertical?

Well, I guess I'd look at it from last quarter where it was 13% and then, this quarter, came back to 18%. So I don't know the year-over-year off the top of my head, but I think we have talked on previous calls that we have seen some impact of some of our key customers developing their own very basic load balancing there. But we think we're executing well on diversifying new with our other offerings into that space and expanding that area, which is technology for us is very broad. But actually, I was happy to see it go from -- up to 18% this quarter.

Our next question comes from Ittai Kidron of Oppenheimer. Ittai Kidron - Oppenheimer & Co. Inc., Research Division: Andy, I wanted to understand again -- on the carrier comments, it looks like, relative to your original guidance, you're about $25 million if we take the midpoint of the guide. And just looking at the run rate you're running at now and the service provider is about $60 million, it feels like you're -- $20 million out of that $25 million was roughly from that vertical, correct me if I'm wrong. Magnitude was very roughly in that range. Now if you're under the assumption that telco is off to an okay start as John mentioned, why should we not see a much greater snapback into this quarter in this vertical? I'm struggling to understand why this is not going to be close to an $80 million to $100 million business this quarter rather than what's your guidance implying another flat quarter for it.

I'm jumping in here to answer. [indiscernible] Look, we're 3 weeks in, first of all. Secondly, I do -- we do have a good pipeline. I feel good about a lot of the drivers. But we had a big miss last quarter. And given that scenario, I think you have to be cautious. And in fact, I think cautious is being prudent. So hopefully, we're being appropriately cautious and prudent. Ittai Kidron - Oppenheimer & Co. Inc., Research Division: Okay. And as a follow-up, John, you talked about the decline in the $1 million orders. But can you talk about that in the context of carrier versus enterprise? Is the same -- do you see the same deceleration in both enterprise $1 million deals, as well as service provider? Or is this distinct to the service provider vertical?

I'm not sure if I really know the answer to that. I -- yes, I was going to give you a gut-feel answer. Let me put it this way. In the service provider pipeline, we have good $1-million-plus deals. So my instincts are it's probably more on the enterprise side. But that's maybe something we'll check. And then, when we have another public forum, we can address that.

Sharon, this is John Eldridge. We're going to take 2 more questions and then sign off.

Okay. Our next question comes from Amitabh Passi.

I just had a couple on my end. First, John, where do you think we are with the Cisco ACE replacement process? Wondering if you can maybe give us a status update on deals and also whether or not you're seeing any sort of a renewed vigor from the Cisco-Citrix partnership? And then, just as a follow-up, I would love to get your thoughts on Diameter signaling, particularly given the recent acquisition made by Oracle. How do you sort of compete against them in this market?

Yes. On the first question regarding ACE, I mentioned -- I think it's a really good opportunity for us. I think that opportunity is going to last a while. I mean, I wouldn't put a timescale on it, but awhile. But more importantly, and we'd said this a number of times, when we're winning, especially in the bigger accounts, that doesn't need to be Fortune 500, but Fortune 500 large organizations. The chances of us doing repeat business and the chances of us expanding our solution portfolio is really, really high. It's a big chunk of our pipeline now, the ACE opportunity. The actual close rates are pretty reasonable, and our competitive win rate has been excellent -- has been really excellent. Now having said that, we don't dismiss the Cisco-Citrix partnership. We've seen it in some areas. But more often than not, we tend to be competing head-to-head with a competitor without Cisco being too much involved.

[indiscernible]

Oh, sorry, yes. And then, the Traffix Systems will -- yes, we feel really good about the Diameter solution, the Diameter product. We think it's the best out there. We thought that before the take-away [ph] acquisition. I don't know what will happen. Acme would also compete in that space. I'm not sure what will happen there. Obviously, that's up to Oracle. But there was really 3 before. And I think that we have -- the deal with us here is basically to get more and more projects to make sure we're partnering with the right partners, and I think that's a good strategy to do that. And I'm very hesitant here because Oracle is a great partner of ours, right? So there is coopetition also a great customer. So -- but I do think the Diameter solution is a great opportunity. Manny?

Yes. And I'll just add 1 comment to that. In the comments, the Diameter business is going as we projected. It's early in the market, as you all know. LTE is rolling out. As LTE rolls out, the complexity of those networks increases, and that's really when you need the DRA and DEA solutions that are in the market segment. So what we've seen is a huge ramp-up in the number of deals that we're being invited to. From an ARX [ph] point of view, we're seeing more proof-of-concepts out there than ever before. And over the last, I would say, 45 days or so, we've seen an interest from a lot of the operators who had already gone with some solutions prior to us entering the market, re-approaching us in that arena for our portfolio. So we're pretty excited. We think it's going according to plan. Obviously, time will tell.

And our last question comes from Jayson Noland of Robert Baird. Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division: I wanted to ask about virtual ADC broadly and then, specifically, what you're seeing with the ADC at some of the large consumer cloud customers in the tech vertical on their usage patterns with that software-based solution.

This is Dan, Jayson. The pattern that we're seeing with that type of customer basically is that they tend to associate the virtual versions down more closely with the application. So as opposed to somebody that would embrace, say, a VIPRION-type solution where you'd see that deploy with, sort of, closer-to-the-edge higher capacity requirements, all the benefits that a hardware solution brings, the vADC [ph] seems to be spread more deeply in their infrastructure and, actually, I'd say, is well within the enterprise. And last quarter, we saw a couple of very nice deals that were driven by that type of adoption.

The other thing is that -- a couple of things on vADC [ph] that I want to push again is our performances is really fantastic, and our hypervisor support is second to none. But the big deal, I think, is the fact that this BIG-IQ management capability, we're talking about software and systems as one across different data centers. So I think we're really well placed there. But it's still early days.

Yes -- and this is Karl. By the way, I'll also add that we will shortly be releasing higher performance versions of our VE's across all the hypervisors, including a new hypervisor that runs in Amazon cloud. And we'll be introducing more cloud-based service as well. And this, again, as John was saying, ties very nicely to our BIG-IQ cloud manager, where we can actually move traffic between clouds and the users to either private cloud or data center. It doesn't matter to us.

Right. And integrate with our partners' orchestration systems and managements systems, which is a vital piece of that solution as well.

Yes. Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division: Is the tech vertical the largest opportunity for what you're talking about here?

I think tech is a big one, but enterprise as well.

I think it's broad-based.

Okay. Well, thank you, all, very much for joining us on this call, and we'll do our best to have an update call next quarter. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.