John Eldridge - Director of Investor Relations John McAdam - President, Chief Executive Officer, Director Andy Reinland - Chief Financial Officer, Executive Vice President Dave Feringa - Executive Vice President - Worldwide Sales Karl Triebes - Executive Vice President - Product Development, Chief Technical Officer Manny Rivelo - Executive Vice President - Strategic Solutions

Ben Reitzes - Barclays Brian Modoff - Deutsche Bank Mark Kelleher - D.A. Davidson Troy Jensen - Piper Matt Robison - Wunderlich Securities Ehud Gelblum - Citigroup Jeff Kvaal - Northland James Faucette - Morgan Stanley Rohit Chopra - Buckingham Mark Sue - RBC Capital Markets

Good afternoon and welcome to the F5 Networks third quarter 2014 financial results conference call. At this time, all parties will be in listen-only mode until the question-and-answer portion. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I would now like to turn the call over to Mr. John Eldridge, Director of Investor Relations. Sir, you may begin.

Thank you, Angie, and thank you to all of you for joining our call. Welcome. On today's call John McAdam, President and CEO, Andy Reinland, Chief Financial Officer will be the principal. Other members of our executive team are here to answer any of questions following the prepared comments. If you have follow-up questions after the call, please direct them to me at 206-272-6571. If you haven't seen a copy of today's press release, you can pull one down from 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 In addition, you can access an archived version of today's live webcast from the Events calendar page of our website through October 29. From 4.30 p.m. today until 5 p.m. Pacific Time, July 24, you can also listen to a telephone replay at 800-391-9853 or 203-369-3269. During today's call, the discussion will contain forward-looking statements, which 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 would like to turn the call over to Andy Reinland.

Thank you, John. The third quarter of fiscal 2014 was a quarter of solid revenue growth and profitability driven by strong uptake of our expanding array of systems and application services. In particular, demand for our security solutions was a key driver of product revenue growth and sales of our Good, Better, Best bundled solutions weighted heavily toward Best continued to grow ahead of our expectations. Revenue in Q3 increased 5% from the prior quarter and 19% year-over-year to $440.3 million, above our guided range of $428 million to $438 million. GAAP EPS of $1.05 per share was above our guided range of $0.99 to $1.02 per share. Non-GAAP EPS of $1.39 per share also exceeded our guided range of $1.33 to $1.36 per share. Product revenue of $236.9 million, grew 5% sequentially and 20% year-over-year and accounted for 54% of total revenue. Service revenue of $203.5 million increased 4% sequentially, 17% year-over-year and represented 46% of total revenue. The Americas region accounted for 57% of total revenue during the quarter. EMEA contributed 23%, APAC 15% and Japan 5%. On a year-over-year basis, Americas revenue grew 17%, EMEA revenue 33% and APAC revenue 17%. Japan revenue was down 3% year-over-year. Enterprise customers represented 68% of total sales during the quarter, service providers accounted for 20% and government sales were 12%, including 3% from U.S. Federal. In Q3, we had three greater than 10% distributors, Ingram Micro, which represented 18.3% of total revenue, Westcon which accounted for 14.8% and Avnet, which accounted for 13.2%. Our GAAP gross margin in Q3 was 82%. Our non-GAAP gross margin was 83.2% GAAP operating expenses were $234.7 million, within our guided range of $228 million to $236 million. Non-GAAP operating expenses were $206 million. GAAP operating margin was 28.6%. Our non-GAAP operating margin was 36.4%. Our GAAP effective tax rate for Q3 was 37.6%. Our non-GAAP effective tax rate was 35.2%. Turning to the balance sheet. Cash flow from operations was $138 million. After repurchasing approximately 1.45 million shares of our common stock for a total of $150.5 million, we ended the quarter with $1.12 billion in cash and investments. $481 million remains authorized under the share repurchase program. DSO at the end of Q3 was 50 days. Inventories were $23.1 million. Capital expenditures for the quarter were $5.5 million. Deferred revenue increased 19% year-over-year to $617.4 million. We ended the quarter with 3,745 employees, an increase of 110 from the prior quarter. With continuing strength in sales of our security solutions and Good, Better, Best bundling options, momentum with Cisco ACE replacement opportunities and a general trend toward broader adoption of our full solution portfolio by large enterprises, service providers and government customers, we anticipate a strong close to our fiscal year. With that in mind, our revenue target for the fourth quarter of fiscal 2014 is $453 million to $463 million. GAAP gross margin is anticipated to remain in the 82% 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 at or around 83.5%. We anticipate GAAP operating expenses in the range of $232 million to $240 million. This includes approximately $23.5 million of stock-based compensation expense and $0.5 million in amortization of purchased intangible assets. For Q4, we are forecasting a GAAP effective tax rate of 38% and a non-GAAP effective tax rate of 35.5%. Our GAAP EPS target is $1.15 to $1.18 per share. Our non-GAAP EPS target is $1.46 to $1.49 per share. We plan to increase our headcount by 125 to 150 employees in the current quarter. We estimate DSO will be in the 50 day range. We expect inventory levels within a range $23 million to $26 million and we believe our cash flow from operations will be at or around $150 million. With that, I will turn the call over to John McAdam.

Thanks, Andy, and good afternoon, everyone. I was very pleased with our performance in Q3. Revenue growth from both services and products was very solid with strong sequential and year-over-year growth in both cases. I was particularly pleased with our year-over-year product revenue growth of 20%. From a sales perspective, the Americas, EMEA and APAC all recorded double-digit year-over-year sales bookings growth. However, sales in our Japan region was down versus last year due to a number of significant orders slipping into Q4. Our services business delivered another solid quarter with 17% year-over-year revenue growth and once again added a healthy 19% increase to our deferred revenue balance, which now stands at $670 million. We continue to experience strong momentum with our Good, Better, Best sales motion in Q3, with customer adoption continuing to be very strong in the Best category, highlighting the successes we are seeing with our security solutions. Q3 was our first two quarter-over-quarter comparison of sales of GBB bundles and I was really pleased to see sales of GBB bundles up 49% sequentially with 73% buying Best. Sales of GBB bundles now account for a very material percentage of our overall quarterly sales. Our security business continues to be our large growth driver with strong sales across the securities solutions portfolio including ASM, APM and AFM. We also started to win sales of our new Secure Web Gateway solution last quarter. Cisco ACE replacement opportunities were another strong business driver last quarter. As we have seen in previous quarters, customers continue to take the opportunity to add functionality, for example, our ASM and/or our AFM security modules when they implement the new F5 solutions. Also, our competitive win rate on these engagements is extremely high with win rates above 90%. In fact, we saw a rise in competitive win rates across the board last quarter as our sales force and partners leveraged our product technology leadership, our GBB pricing and our Synthesis architecture with the unmatched depth of our security and application optimization services functionality. We closed the acquisition of Defense.Net last quarter. This acquisition increases our growing security solutions portfolio with cloud-based security services for protecting data centers and Internet applications from distributed denial of service, DDoS, attacks. Defense.Net's high-capacity cloud service is complementary to F5s existing on premise DDoS protection capabilities. The combination provides customers with the most comprehensive hybrid DDoS solution, engineered to absorb the full threat spectrum of DDoS attacks. In the service provider market, we are seeing good traction with our integrated service provider solutions. For example, we are seeing project wins of our new policy enforcement module, PEM, to provide traffic steering and policy-based enforcement. Also we are making good progress with our GI firewall consolidation strategy and we believe this to be a very large opportunity in the service provider customer base. We continue to see new project wins to our Traffix Diameter solution, including a new Tier 1 service provider in Europe, which involved a new used case for Wi-Fi offload. In Q3, we introduced hourly utility licenses on Amazon Web Services AWS. We now have two offerings inside of AWS. Customers can now deployed the F5 BIG-IP platform in the AWS cloud utilizing either their own license via Bring Your Own License or they can hourly licenses on AWS marketplace. Both models cover a wide spectrum of customer needs, allowing us to serve our current enterprise customer requests as well as the needs of new smaller customers. Both offerings have adopted our Good, Better, Best pricing models. I am very excited about our technology direction and proposed deliverables on our product roadmap in the short, medium and longer term. Our product roadmap priorities align well with the trends in the main areas of our business focus. You will see F5 continue to introduce significant enhancements and world leading technology in our key areas of focus, security, service providers and mobility, the cloud and software defined data center architectures, F5 solutions as a service and management and orchestration. We will be delivering another major revision of TMOS in the near future known internally as our Alpine release. The TMOS Alpine release includes approximately 124 new features with over 50 new features for security. Examples of new security functionality includes good integration of our Versafe module on BIG-IP for native deployment of WebSafe anti-fraud and detection services. Centralized management support for ASM and BIG-IQ, more GI firewall support for AFM, including significant new centralized management capabilities and BIG-IQ. Security to support extremely large customer deployments with larger rulesets and significant new DDoS capabilities, including over 100 vectors in hardware with new capabilities such as behavioral analysis. Alpine will also include a new REST API for our ASM web application firewall. The REST API support for ASM allows operators such as enterprises and service provider to provision and scale vast services from the cloud. Alpine will also include significant features focused on our service provider market, including new message based traffic steering capabilities, allowing BIG-IP to natively steer and process SIP and Diameter traffic. Additional enhancements to our new policy enforcement module for fixed line use cases, as well as PEM and Traffix SDC integration. New carrier grade NAT features, including new iRules-based capabilities for additional programmability and flexibility and powerful enhancements to TCP optimization functionality giving service provider significant increases in functionality for optimizing their ever-growing traffic workload. The Alpine release will also include significant features for SDDC and cloud architectures, including integrated support for Cisco ACI, VMware NSX SDN, Microsoft System Center Virtual Machine Manager, and OpenStack plug-in for the Neutron (Load-Balancing-as-a-Service module. We are making great progress with our SDN partnerships and I believe that these partnerships will prove to be significant business drivers for us in 2015. As far as the outlook is concerned, Andy indicated that we expect to deliver to a sequential and year-over-year growth this quarter. The drivers of our business remain robust as we enter the final quarter of fiscal 2014. We experienced a very strong increase in our new business pipeline in Q3 up significantly from last year which should bode well for Q4 and fiscal 2015. Our Synthesis architecture for software defined application services 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 expands our addressable market and increases the types of revenue streams available to our sales force and partner channel. As Andy mentioned earlier, we are planning to invest for growth in the business moving forward. Our intentions are to continue hiring in Q4 with the target of 125 net adds to the F5 team. We will also be making infrastructure investments in additional data centers and security operation centers to ensure growth in our cloud-based opportunities, including Defense.Net, Versafe and general F5 as a service solutions. As I stated earlier, I believe F5 is in a really good position to take advantage of industry trends and customer requirements. In conclusion, I would like to thank the entire F5 team, our partners and customers for their support last quarter. And with that, we will now hand the call over for Q&A.

(Operator Instructions). The first question comes from Ben Reitzes from Barclays. Your line is open. Ben Reitzes - Barclays: Yes, hi. Could you talk a little bit about, as Cisco's rolling out ACI, what your go-to-market situation is like? And if you are seeing a pickup there in the pipeline of those related sales around ACE and whatnot? And then also if you could just comment on Federal and carrier verticals? What are the trends there? We have noticed Federal picking up with some folks. Thanks a lot.

Okay. Regarding the Cisco and ACI, and if I take -- this comment I am going to make actually apply to the VMware with NSX as well and with both those organizations we are deeply involved in integration at the product development level right now and we feel good with the progress in that. And we are actually starting to train our sales force in both solutions, but also on sales by sales territory scenario meeting up with our counterparts and making sure that our go-to-market is absolutely optimizing. Maybe Dave Feringa would want to comment more on it.

Yes, I would say across all three theaters worldwide, we are seeing great engagement with both Cisco and with VMware and a number of large opportunities. The one thing, I think, is really encouraging is it's happening organically. There is not a lot of push from the executive management for it to happen. The sales people themselves are seeing the opportunity to work together and we are seeing a lot of great longer momentum in that business and we think it is going to be great for us over the next year or so.

Yes, and on the vertical, first of all, Federal, I mean, it was typically a little bit lower from a revenue percentage this quarter. However, actually sales bookings were higher than that. So we feel reasonably good about Federal moving into the final quarter. We expect it to be pretty solid actually. We love the team there and it was actually a (inaudible) through the pipeline and the forecast and that feels quite strong. So we will see what happens there. On telco, it's pretty similar. I mean, you are going to see that lumpiness. It was at 20% this quarter. It has been as high as 27%. We tend to look at it in the 20% to 25%. It is still very project oriented and the thing I did say on my prepared remarks were, we will start to see some nice progress with new solutions like the policy enforcement module linking in with the SDC Traffix solution there as well. And so, they are both, that and finance are really our strongest verticals moving forward. Ben Reitzes - Barclays: That's great. Thanks for the color.

Thank you. Brian Modoff from Deutsche Bank, your line is open.

Hello. Brian Modoff - Deutsche Bank: Can you hear me okay?

We just heard you there, Brian. Brian Modoff - Deutsche Bank: Okay, great. So anyway, in terms of the new product release, can you talk about what features are going to be the key to the customers in terms of what their demands are? And how do you expect that to affect hardware loading in demand on terms of people meaning to upgrade their boxes to accommodate some of these new features, particularly around the telcos? Thanks.

Sure. Hi, Brian. This is Karl. It's a big release, and it's pretty broad, and basically we are significant enhancements across the board for security, service provider, our cloud products or our core markets products. And so in terms of loading and the impact it might have in terms of customers and CPU, I think you are referring to that, as you turn on more functions you can use more system resources. And so I don't know that the features would have that big of an impact. I think the packaging and with Good, Better, Best and how this is being taken to market probably has more of an impact, because the customers now are consuming a much greater number of our services across the board. So especially service provider, for example, we have introduced a lot capabilities around GI firewall to make that work better for them (inaudible) features there. So we would expect that to uptake, but the performance that we have in that product is still quite a bit off the charts. Now PEM uses quite a bit of functionality in the platform. It does things like classification. It's enforcing policies. It's doing bandwidth limiting. It's doing a lot of traffic steering capabilities. So depending how that's leveraged, that can use a number resources as well and encourage people that use it to go for our bigger platform, like the eight slot VIPRION or the four slot larger one. So I think there is just a lot of opportunity there. We have introduced a lot of new enhancements to PEM. We are classifying over 750 protocols and applications, both web-based and non-web-based. And so it's quite a large set of capabilities and differentiated capabilities there. John, is there is anything you want to add?

I will just add from my perspective, Brian. It's not quite answering the question, but the thing that excites me about the Alpine release, if you listen to some of the story that I did in the prepared remarks, is that we have really focused a lot of the functionality on the real growth drivers that we are seeing right now, like security, like Solutions as a Service, taking the Versafe acquisition and putting into TMOS as a module. We have a long history of that. It has been a very successful technique for us. We are certain we are doing well there. I think Manny, you can highlight.

Yes. The only thing I would add, Brian, to that because you asked specifically about service providers and we are seeing it and this is predominantly -- we are seeing it across the globe, but the use case, I will talk about it, is predominantly right now in Asia where as we have enhanced the feature functionality for those service providers. They are actually telling us that based on the Internet traffic growth, because now we have strategic point of control in those service provider network that they want to see not only faster interfaces, but actually faster even boxes. Whether we cluster those boxes or we actually build faster boxes, they are absolutely right. As consume more services, the need is there for higher performance, both on the throughput level as well as the connection levels and really if the growth that's happening with mobile that's driving that innovation, if you will, in the service provider arena. So we are well positioned there. Brian Modoff - Deutsche Bank: Okay. Thanks, guys.

Thank you. Mark Kelleher from D.A. Davidson, your line is open. Mark Kelleher - D.A. Davidson: Great. Thanks for taking the question. I was wondering if you could give some more detail on the geographic breakout. Japan, down 3%. You said orders were slipping. Is that a competitive situation. I know one of your competitors is strong there. Or is that a macro? And then to flip that, EMEA very strong, up 33%. What's driving that? Is that macro? Is that specific deals? Thanks.

Yes, I think that's a fair question regarding the competitive scenario. We don't have enough details on the actual -- what really happened in Japan apart from the fact we know that a few fairly large deals, and actually large, I mean, multimillion dollar type opportunities did slip. So that was the biggest reason. Having said that, A10 have done well competitively in Japan and we will what our win rate is there as we look in more detail. But the main message is elsewhere. Our competitive win rate has gone up pretty significantly this quarter against everybody. In the Americas, we looked at on Monday and we saw a fairly material rise in percentage wins. So Japan, I don't know, but maybe they are the one outlier there, they do tend to focus, by the way, in Japan on lower end products. So we will see. But overall, we feel really good about competitive position. Mark Kelleher - D.A. Davidson: And EMEA? Was that --

EMEA has been solid for us for a while now. We are making a lot of progress there. David, do you want to comment specifically on this?

I would say one thing, the EMA team has done a really good. They have been leaders with our security solutions for quite a while and they have really been driving it to our customers and I think that's been one of the reasons we have been driven up growth in EMEA at a really nice clip. Mark Kelleher - D.A. Davidson: Okay. That's all I got. Thanks.

Thank you.

Thank you. Troy Jensen from Piper, your line is open. Troy Jensen - Piper: Yes. Congrats on the nice quarter, gentlemen.

Thank you. Troy Jensen - Piper: A quick one here for John. John, I know over the past year you talked about the number one company objective was accelerating product growth. You clearly achieved this. Bu the comps started to get harder from here. So just curious to know if there is any type of a product growth rate that you are targeting going forward? Or it's something we can benchmark into? And then I have a follow-up for Andy.

This is another one where I am smiling here. We knew we would be asked this question. We are very, very focused in product growth. Product growth is what makes the world go around and companies like ourselves, and we are very focused in doing that. We are not going to give any forward statements. We have given you -- you have got the guidance we have given for Q4 and you can make up your mind in that. We would say the pipeline, I did say the pipeline, we did a new business pipeline. It was very significant, the create rate last quarter it was. So that makes us feel good, but we are not going to give any actual numbers. Another indication, typically, of our confidence is our hiring and you can see that we want to go on a fairly aggressive hiring focus in the next quarter as well. Troy Jensen - Piper: Perfect, and that goes into my follow-up here, maybe for Andy. Both of you guys have talked about investing for growth. So can you just about implications on operating margins? Do you expect to see much deterioration or modest what the spending there?

If you line up the guidance that we have, I think you will see that for Q4, we will see a little more strengthening in the op margin for the quarter. And next quarter, we will talk, on the October call, where we give guidance for the year, but what I would expect is for us to pretty much outline an operating margin year like we saw this year. But again, that's, if we are seeing the revenue growth, we are going to keep investing to drive the top line and that's going to be the focus. Troy Jensen - Piper: All right. Understood. Good luck going forward, guys.

Thank you.

Thank you. Matt Robison from Wunderlich Securities, your line is open. Matt Robison - Wunderlich Securities: I was wondering if you could help us understand, characterize the age of the installed base you are replacing these days? And maybe talk a little bit about the security market adjacencies that we can expect with Alpine or any other near-term product releases?

Right, and Matt, I don't know if it was on previous calls or in webcast, I have given information at certain point where we were on the installed base with installations greater than two years, three years, and five years and above. And these are significant numbers. I don't have them to hand right now. But what we will make a point of doing is next public event, we get a chance to do that, we will give out that information. The reason I am saying that is, there is still a long way to go on the product refresh. I know that. I just can't give you exact numbers in terms of the greater than three installed base because it tends to be pretty significant, something because there is redeployment that goes on as they do the refresh. But in terms of, do I feel that the product refresh capability is still a year or two years more, two years plus in it, I think it really has. What's going to drive that is extra functionality as well, but we will try and get that data at the next public event. Matt Robison - Wunderlich Securities: Nice to hear you have got such visibility in what's left to do. What about the adjacencies?

Yes, I mentioned it's our biggest driver. We continue to add functionality to it in terms of the solution portfolio. DDoS, I think, is going to be very big for us with our differentiated hybrid solution of on-premise and now with Defense.Net, we think we got a great decision there. By the way within just over a week of the DDoS acquisition, we started to see orders coming in for we were actually approached. So I don't want to get too carried away on this one, but we did see that at the beginning of it. We were actually balancing in fact how aggressively we bring that to market with the resources that Julian and his service team that are going to drive this, putting in place. But I think that's going to be good for next year. And then you have things like what we are doing with GI firewall. There is whole load of what's going on in security, specifically.

This is Karl. I would jus add a couple of things. With integration of WebSafe from Versafe into BIG-IP, that simplifies our anti-fraud deployments and we actually have a mobile application as well, that we are in the process of integrating as part of that. So we will be able to address both traditional PC-based access as well as mobile as we go forward. That simplifies that. GI firewall, as John said, is big because we have massive scalability but we are also shortly releasing extensive new capabilities on our management platform that give us centralized management for both firewall as well as for our web application firewall. So now it makes it much easier for large service providers to off and deploy these services and there's native capabilities there. So those are just a few examples, as John said.

The other, I am not sure I would call it as adjacent, but I guess to some degree it's an adjacent scenario, but we really believe with the progress we are making with our SDN partnerships, that could be very, very profound, is a word I have used quite often about this in terms of being a growth driver going into next year as well. Matt Robison - Wunderlich Securities: Is the outbound and application firewalls fitting there with any of the stuff?

For outbound, we have our access policy manager with our Secure Web Gateway integration as part of that. So that's a portion of that outbound used case if you look at. We are actually integrating identity as part of our firewall solutions. So we are actually using the identity components that we have in our access policy manager to allow security policy not just based on application, but user and endpoint as part of that and actually endpoint application as well. So that opens up additional use cases. We are not trying to go head-to-head, say, like with the traditional next-generation firewall from, say, like Palo Alto or somebody like that. It's more inbound user and application focused. Matt Robison - Wunderlich Securities: Thanks a lot.

Thank you. Ehud Gelblum from Citigroup, your line is open. Ehud Gelblum - Citigroup: Hey, thanks, guys. I appreciate it. A couple of questions. First of all, I know you don't give the technology vertical anymore. You stopped doing that a few quarters ago. But if you were to isolate the Web 2.0 type players out there from the other service providers and the other types of customers, is there anything you can give us a sense as to kind of what their activity level is doing? Are they accelerating in line with what we are seeing out of your topline or stronger? And then on Versafe, now that you have got a couple of NOCs up and running, it actually has real OpEx associated with it as opposed to some of your other product, where it has COGS but not sales, et cetera or OpEx, but there is actual real OpEx in operating the Versafe operation. I was wondering, is it breakeven yet and where do you expect it to, obviously, integrating it into Alpine should provide a huge boost for it? Where do expect it to go? So I am trying to get a sense as to where it is now, where do you expect it to go and if we can look at it from a profitability perspective with respect to its ongoing cost and the return on that, that would be helpful.

Yes, this is John, Ehud. Let me answer the Versafe and I will pass the vertical to Andy, although I will help on that before I do. On Versafe, absolutely we are investing in this right now. It's absolutely not at breakeven because we haven't unleashed Versafe yet to the sales force and frankly we will probably do that as we start the fiscal year at the sales conference. It will be a lot easier for us to do that when we have it integrated as a module in TMOS. Having said that, we have taken orders over the last couple quarters. We are building the customer base but we are at really early stages of increasing the investment in the SOCs and therefore obviously that is some OpEx. But I think something I think we are digesting and balancing well and I think it's going to be a nice growth driver for us. Regarding the verticals and I will pass it to Andy, if he want to add more to it but we are not breaking out the technology. That means we don't want to talk about it. We believe it's very similar to enterprise and that's why threw it in there. Because we are talking about companies like large server companies as well as some of the dotcom companies we include that in the vertical. But what I will say is, that's still a strong part of our business and I don't see that changing.

And that's exactly what I was going to say. It continues to be a strong vertical for us. We just have chosen the tact of not getting into detail, especially because it's a smaller number of large companies, is the implications to that discussion and that really isn't the makeup of that vertical. It's much more broad than that. So we will stick to the enterprise level.

This is Karl again. I was going to say one other thing about Versafe. It's not only interesting with its core business, but the technologies involved in that, we are able to leverage these in other areas. So we are working on some new products for the future that will allow us to have much more advanced capabilities around things like, say, botnet detection. Being able to detect so far DDoS capabilities and do these things like that. Being able to detect things like malware. There is a lot of areas that this technology can take us. We are looking at these and how we might productized some of this as we go forward. We will talk more about this at our November conference. Ehud Gelblum - Citigroup: Right. You will talk about it at our conference in September, too. But just to clarify, John, what you said, so it's not breaking even? Or it is breaking even?

Well, it has not breaking even yet. Ehud Gelblum - Citigroup: Okay. That's what I thought where you were going with that. Okay. Thank you. So that's the reason, one of the reasons why that is weighing on OpEx or weighing on operating margin right now, why operating margin is in the 36%. Presumably without this, it could have been a point or so higher.

Well, we are not going to say that but the key thing if you look at in operating margin s the hiring we are doing. That has got the biggest effect. Ehud Gelblum - Citigroup: Right. Okay. I appreciate it. Thank you.

Thanks.

Thank you. Jeff Kvaal from Northland, your line is open. Jeff Kvaal - Northland: Yes. Thanks very much. I was wondering if you could help us a little bit, talk about how far through the transition is the Good, Better, Best pricing structure that you are. Obviously it's been very successful in your first two-plus quarters out of the gate. It sounds like it's a material percentage of sales. Is this something that's going to be a tailwind for another two quarters? Another two years? How should we think about that?

We will see. As you say, you pointed out, it is two and half quarters, it's not even two and half quarters. Its just over two quarters and we feel really, really happy about the sequential increase this quarter. More importantly, we feel very, very happy about the sway towards the Best choice, which is way above what we modeled. But when we look at it by geography, and I guess this is no surprise, but the Americas is way in front in terms of the percentage that they do. So we would expect EMEA probably to catch up fairly quickly and then APAC and Japan to catch up as well. So that gives definitely, I think, gives us a headwind there. But the enthusiasm in the sales force is very good on this and the customer reaction is very good. So I think it's going to be pretty good momentum, but we don't to day for how many quarters.

The other thing that I would add is that we saw our average order size increase again this quarter from 110,000 to 115,000. Still too early to pin that directly on Good, Better, Best alone. I think there's broader momentum in the business that's also adding to that, but still is an element to it.

Yes, and the other thing I would add, Jeff, this is Manny, is although we are in this transition and it's becoming one of our primary selling motions from a licensing perspective, and I think that will increase to John and Andy's point, there is an after effect that we believe will also happen in that, is as customers try the new modules because we are with bundling those modules, they are beginning to deploy those modules, we should see additional footprint. So there is the other effect of more presence in these accounts in new places in the network that we classically have not been in and that's the result of having that functionality and extending that functionality using the software defined application services architecture. So hopefully it will be in the future for a long time. Jeff Kvaal - Northland: I get it. So the idea, then, is they will be using more modules, and therefore they will require more capacity, and therefore the incremental sale will come there --

Well, also as they test out modules, they will buy more of them. Jeff Kvaal - Northland: Okay. All right. Thank you, gentlemen, very much.

James Faucette from Morgan Stanley, your line is open. James Faucette - Morgan Stanley: Thanks very much. I just had a couple of quick questions related to your business with service providers. We have heard from a few other vendors that service provider has been weak, and just wondering if you have detected anything in that area. Or if particularly your new products are doing so much to mask that, that's hard to detect for you at all? And then secondly, on the service provider opportunity, I think you have said in the past that Traffix alone might be worth as much as $100 million to $200 million. Just wondering if you still feel like that may be the case? And how you are thinking about the size of the service provider market overall?

Yes, and first of all, and we get asked this question a lot, when you get a bit of capital spend in service providers. I just don't think it has a significant material effect. We are still very project driven. We are very driven by traffic being money to own the network and going into the data center. We gain from introducing new technology like our GI firewall and like the PEM area. So that does mitigate that that type of spending was constrained, but I don't think that's a big issue for us. I think it's more project oriented. Regarding Traffix, we have not given out any -- very, very specifically, we have not given out any guidance in terms of what we think the size of that can be. In fact, we have even been asked about the size of the market and you can look at various analyst reports and we don't even comment on that. We are more focused on finding project wins, finding use cases and just growing the business that way. And the other thing about Traffic, just to remind you this is a much more complex sale for us and that includes revenue recognition. It's not just a matter of shipping the product and invoicing the customer and getting the money. It's all about milestones and consultants. So it's a longer sales campaign and a longer implementation campaign. But we are not giving out any numbers in terms of guidance. James Faucette - Morgan Stanley: Thank you very much.

Angie, this is John Eldridge. We are going to take two more questions and then end the conference.

Thank you. Rohit Chopra from Buckingham, your line is open. Rohit Chopra - Buckingham: Yes, thanks. I just wanted to ask you a question on security, if you don't mind. Just want to come back to Secure Web Gateway and DDoS. John, these are highly competitive markets. They have embedded players. People have been there for years. How do you get material traction there without having an impact, for example, a negative impact on operating margin? If you could just maybe talk about the go-to-market there? And how do you make a bigger splash in that market?

Yes, let me start with DDoS. First of all, we have been very, very successful with DDoS ever since we introduced our AFM module, our general firewall module. In fact our drive into security, apart from the WAF we have had for years, our drive into the firewall space actually started with DDoS attacks, with the whole WikiLeaks business that went on, where a bunch of our customers were attacked regarding the WikiLeaks fiasco and we actually, in our iRules onto our ADC platform to protect them because the firewall couldn't cope with the volume. So long story short, an ADC architecture is ideal for protecting against DDoS attacks. And as I say, our on-premise capability along with our roadmap where we have been putting DDoS protection vectors within FPGAs in the hardware because of the volume, very differentiated. So for us, now to have an off-premise solution is very synergistic. WE have already got a great reputation to be able to offer the hybrid capability. It is frankly an easy sale and was well accepted by the sales force. Although remember my remarks earlier, is that we are making sure we invest appropriately before we unleash the off-premise version on the sales force, but we have already seen orders for it.

Yes, and this is Manny. I will just add maybe a little bit more context around each of them. First, starting with DDoS. There is no question that DDoS, as John says, is something we have been doing for a long, long time. And our on-prem footprint is what's led customers to ask us to be out in the cloud. So the cloud has really been customer driven because they want a hybrid solution to being able to do that. And what drives that is our success on prem, what's driving that is our performance capability on prem. The fact that we continue to do things at wire rate on prem, recall in the Alpine release, we will over 100 DDoS vectors, all done in hardware and then having a hybrid solution to differentiate solution in the market. Nobody really provides a hybrid solution today. They have a service on the cloud or service on prem, not truly a hybrid one. And at Secure Web Gateway, it's a similar set of technologies. Performance is one leadership position we have. We feel very comfortable with the performance we have there relative to anything that's in the market. Obviously we are starting out with an on prem solution. That makes logical sense. By bundling it now as part of GBB, that gives us an advantage. Customers can now test that module and reduce their total cost of ownership while getting the performance benefits that they have out there. And the other piece is more and more of the traffic, that's leaving the enterprise is encrypted. It's leaving out as HTTPS transactions encrypted and customers need high-performance decryption capabilities to be able to inspect that traffic for data loss prevention and things of that nature. So those are some of the value statements, if you will, from just a raw technology point of view that we bring to the table that lead to very promising conversations. Rohit Chopra - Buckingham: Thanks, John. Thanks, Manny.

Thank you. Our last question comes from Mark Sue from RBC Capital Markets. Your line is open. Mark Sue - RBC Capital Markets: Thank you. Gentlemen, as we conclude, I just have a question on just the pricing dynamics that we have changed. Intuitively, when we have à la carte pricing that benefits the buyer and when we bundle and the deals gives you the advantage to the seller, now there's a bit of more for your money here with GBB. So the question is, what happens when customers have fully adopted the pricing change? What happens over the longer term? Are we actually front-loading some consumption?

First of all, I am not convinced on the statement you made, Mark, about bundling GBB. I think that actually benefits the buyer in a big way and the actual incentives we have given to make that happened are quite significant, which I think is why it has been so successful. I think the real thing, the real issue is, and we have to make sure we do this, the real issue is to make sure that the customers and the account managers make sure the customers realize the depth of functionality they have, use as much as possible and then that will increase that uses of the functionality. I think that's the real opportunity for us. Mark Sue - RBC Capital Markets: So John, should we think of it as super-sizing and adding the fries and the Coke and the customers actually wait a little longer to come back? Or do they actually consume more?

They tend to consume more. The best example of this and its not really GBB, is the Cisco ACE opportunity, where I mean its being it has been fascinating for us to watch. The initial conversation is, can you place our load balancer. That quickly moves to, we have much more than that, and then that quickly moves to, oh, we are going to install your WAF, I am giving an example here. WAF is a firewall throughout the organization as we look at the whole portfolio.

And Mark, it's Manny. Just a quick comment. This is not and obviously Dave Feringa can talk about this in great detail if we can when we get together in November, but a typical selling motion that can occur as a customer who comes in and I will talk about an ACE replacement who may come in and want to do like-for-like transaction, replace that ACE load balancer with that F5 load balancer because of the market leadership position we have. And once we explain to them the platform and the Delta in value that reside in that platform as it pertains to the additional services, it is not uncommon for me to hear the words, I am not sure where to start. And what that means is how many any issues or problems we can help alleviate for him. Obviously the place to start is just the replacement and to grow from that replacement as we move forward, but that is highly a very typical situation that we see out there and we are exposing with GBB is that additional value making it easy, taking the friction out of that and as a result of that hopefully, customers can realize that value going forward.

And the value includes not just extra functionality that we are talking about but it typically saves the money on their existing deployments in a big way. In other words, taking out 100 firewalls and replacing it by five of those. That type of thing. Mark Sue - RBC Capital Markets: That's real helpful. Okay. Thank you, gentlemen. Good luck.

Thank you.

Well, thank you all for joining us today and we look forward to another good quarter and we look forward to talking with you all again in a couple of months.

Thank you. That does conclude today's conference. Thank you for your participation. You may now disconnect from the audio portion.