John Eldridge - Director of IR John McAdam - President and CEO Andy Reinland - EVP and CFO Manuel Rivelo - Upcoming CEO Edward Eames - EVP, Business Operations

Jason Ader - William Blair Amitabh Passi - UBS George Notter - Jefferies Michael Genovese - MKM Partners Mark Kelleher - D.A. Davidson Rod Hall - JPMC Jeff Kvaal - Northland Capital Rohit Chopra - Buckingham Research Paul Silverstein - Cowen and Company Sanjiv Wadhwani - Stifel

Good afternoon and welcome to the F5 Networks Second Quarter 2015 Financial Results Conference Call. At this time, all parties will be able to listen only until the question-and-answer portion. Also, today's call is being recorded. If anyone has objections, please disconnect at this time. I'd now like to turn the call over to Mr. John Eldridge, Director of Investor Relations. Sir, you may begin.

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 exec 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 releases are 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 In addition, you can access an archived version of today's live webcast from the Events Calendar page of our website through July 26.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 mid-point 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 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. 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 I go on to talk about Q2 results and Q3 outlook, I just want to say a few opening remarks on the organizational announcement that we released today. Firstly, I’d like to congratulate Manny Rivelo on his appointment as President and CEO of F5 effective on July the 1st this year. When I announced my intention to retire on October last year, I stated that a key priority would be to work closely with our board to have a smooth and effective transition plan for my successor. I will work with Manny and the F5 executive team over the next couple of months to ensure a smooth and efficient handover of responsibilities and then assume the position of Non-Executive Chairman of the F5 board. Al Higginson, who has been our Non-Executive Chairman for the last 11 years, will assume the position of Lead Independent Director. I am confident that Manny’s understanding of technology trends, his strategic vision, operational experience and tremendous culture fit with the F5 values will ensure that F5 continues to have a fantastic future and I’m sure you will join me in wishing him great success in his new role. Okay, let’s talk about our Q2 performance and our outlook for Q3 and beyond. Overall, I was pleased with our performance in Q2. From a sales perspective, the Americas region had a very solid quarter with double-digit year-over-year sales bookings growth, delivering their internal forecast. In particular, sales from million-dollar plus deals in Q2 increased significantly over Q1 and this was a significant factor in the Americas region’s strong results. The EMEA region continued to deliver year-over-year sales booking growth, though the growth was not as strong as we have seen in previous quarters and was below our internal forecasts. Sales in our APAC region were also below our initial forecast and sales in Japan were slightly above the forecast. Our services business continued to deliver solid results and excellent profitability along with a healthy increase in deferred revenue, which is now approximately $721 million, up 6% sequentially, which should bode well for future business. From a software perspective, the latest industry analyst report show us as a clear market leader in the virtual edition ADC market, driven by our ability to provide us solutions as virtual software offerings -- software only offerings across all the major hypervisors and a unique orchestration functionality in BIG IQ to enable customers to move to software-defined data centers and NFV architectures. Also, the combination of GBB pricing, virtual ADC sales, and a solid attach rate of software modules continue to result in solid software growth. We had a number of large project wins with our security solutions last quarter. And in our Q1 call three months ago, I mentioned that we had won a large scale AFM Gi firewall project in a Tier 1 service provider in North America. This project is now in production. We received more orders last quarter as the customer rolls out more of the Gi firewall solution throughout their network, and we expect to see continuing business from this project during this fiscal year and in fiscal 2016. We also plan to replicate the success wherever possible in the overall service provider market. We continue to believe that our security business will be a largest growth driver. We expect to see strong demand for our increasing portfolio of security solutions as customers look to adopt hybrid architectures, deploying applications both in premise and in the cloud. As you will recall, we launched our Silverline hybrid application strategy in November with the initial launch, including our subscription based DDoS service and our anti-malware and phishing protection service. We extended our Silverline services platform a couple of weeks ago with our industry leading WAP capabilities. As the latest addition to F5 Silverline’s cloud-based application services platform, the new WAP offering is built on our industry-leading ASM solution. We now offer our customers leading WAP services in both on-premise and subscription-based cloud offerings. This new cloud offering provides both ease and speed of deployment and allows organizations to confidently incorporate cloud resources, while protecting apps and data from increasingly sophisticated security attacks, risks and vulnerabilities. I was very pleased with the progress we made on our strategic initiatives in the service provider market last quarter. We had a strong presence at Mobile World Congress, where we showcased NFV solutions that power and secure service provider networks. Sales in the service provider market were very solid last quarter with sales bookings at a record high. The America regions, in particular, had a very solid quarter with several wins with the Tier 1 service providers as well as a number of competitive wins in the cable companies. We won several competitive replacements last quarter, including the Gi firewall project I mentioned earlier, and we had some solid wins with our traffic to LTE solution, including license upgrades as LTE traffic increased in the installed base. Also Gi consolidation traffic steering optimization also continue to be good drivers for us in the service provider market. As I mentioned last quarter, our hybrid application services based on our Synthesis architecture and Silverline cloud services is resonating really well with our customers and partners. This strategy combined with the strength of our partner ecosystem in areas like SPN provide F5 with the opportunity to play a very strategic role as customers continue to strive for competitive advantage and maximum agility by moving to new technology architectures. Also, our portfolio of application products and cloud services continues to expand aggressively, which in turn significantly expands our addressable market and increases the types of revenue streams available to our sales force and partner channel. As far as the outlook is concerned, Andy indicated that we expect to deliver both sequential and year-over-year growth this quarter. Although we faced some potential headwinds as a result of the currency movements in some regions, especially EMEA, I was very pleased with the positive rebound we experienced with the revenue from million-dollar plus deals and I continue to believe that the fundamental drivers of our business remain robust. We remain committed to plan for growth in our business by investing in headcount and infrastructure moving forward, whilst delivering world-class operating margins. I believe that our existing product portfolio, our hybrid applications services strategy and our product roadmap are not only in-line with customer and market trends, but also key to enabling those trends. In conclusion, I would like to thank the entire F5 team, our partners and customers for the support last quarter. Before we move over to Q&A, I’ll hand over to Manny to give you his thoughts on F5’s opportunities looking forward and talk briefly about our strategic initiatives.

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 [ph]. 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 towards 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 hearing what motivates them and to hear about their ideas on how to make F5 even a better place to work and also how best to 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. And I will turn the call over for Q&A.

Thank you. [Operator Instructions] First question comes from Jason Ader, William Blair. Your line is open.

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 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 as it being just complementary. We are seeing actually 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 is 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?

The next question comes from Amitabh Passi, UBS. Your line is open.

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 [ph] 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 where we expected.

And then maybe just as a quick follow-up, just on your GBB program, can you give us a sense where are we, 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 actually 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.

Thank you. Next question, George Notter, Jefferies. Your line is open.

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 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.

Yeah. This is John. We pertain to talk to face-to-face and/or video with our sales management in Latin America as well as in EMEA and really drill down on it. EMEA is – to actually give you a number is difficult. It really is, because if you think of some of the things that we see when you get these currency issues, especially when they are fluctuating quite significantly, your VAR channel [ph] who could make the mistake of taking an order and lose money almost for the time that that order is being paid for by the end-user customer. So that tends to make them shy and we definitely got that feedback from South America. We definitely got that. We expect that similar things happened in EMEA, but it's a little bit too early to actually give you a number, but we do -- given what we saw as Andy mentioned at the end of the quarter in terms of the slip, which we don't really see that often at all from those regions, we're pretty sure that's got to linked to the foreign currency, the exchange rate I should say.

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?

Yeah. It’s hard to -- I mean, what we tend to do – what do we tend to when we've seen issues like this in the past, macro issues like in the past, we basically go back to the roots of looking at the close rate percentages and hopefully as I say, we've adopted an appropriately conservative, but realistic close rate.

Got it, okay. Thank you.

Thanks.

Next question, Michael Genovese, MKM Partners. Your line is open.

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 service 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 $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 trying to doubt that, because what we’re -- really what we're doing is, we're basically making sure that we get into a big number of markets, not only security, so the more we’re successful in security and we feel good about our progress, the more we'll get into that faster growing market. I could give you a number on security but, I don't want to, that's going to be misleading, because we need -- it needs to be a bigger percentage of our business, it's growing and so we -- that's our strategy, so rather than giving you just one number of the ADC market, remember, we are using ADC to get into other markets, hopefully fast moving ones like mobile traffic and security.

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

Thanks.

Next question, Mark Kelleher, D.A. Davidson. Your line is open.

Great, thanks for taking the questions. Just want to look at the million dollar deals, you said those increased significantly in the quarter, that's great. What's your anticipation as we move into the next quarter, does that momentum continue, do we make up the -- does the components of that guidance make up smaller deals, what's your thought there?

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 I 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, you know, what's being 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?

Yeah, when we’re looking today at that mix between product and service, I really think it's more, the service tends to trail product, right, so we're seeing a lot of good service growth off of last year's tremendous product growth, and if we don't get product reaccelerating again, we'll probably see service start to slow down over a longer period of time. So that's the dynamic there, but nothing --

And if you look at, obviously product revenue acceleration is always going to be a major financial goal, as we -- the rest of the business I think in good shape in terms of profit, et cetera. So that's always a thing, and the two big areas there are service provider and security, and I have to make sure both. And there is going to be other areas where we see growth areas, obviously subscription is one where, it will be a while before we see the growth, but once we see it, it keeps on giving, but you know, number one focus, product revenue growth, but meanwhile, we’re also creating this other channel using subscription services in Silverline to make sure that we’ve got good recurring revenue at a product level as well as a service.

And just for clarity, in case I missed something there, our subscription revenue that comes from the Silverline service goes into our product revenue, so it will be a part of that. And the interesting metric that as it gets more meaningful that we’ll start to look at more closely is, deferred revenue and the growth there obviously, because that’s a setup for future revenue. So, we’ll talk about more -- that more in future quarters as it becomes more meaningful.

Okay, great. Thanks.

Next question from Rod Hall, JPMC. Your line is open.

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 tended to have addressed 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.

And you guys -- I guess the follow-up then Andy is, given that, are you -- so, you haven’t accelerated price decline in dollars to try to compensate for the local currency fluctuations at least in some of the regions, where currencies are really badly impacted like Brazil and Russia and so on, or have you not really moved to do that sort of thing yet?

Yeah, we haven’t -- we’ve not responded with lowering pricing and never really have and probably won’t. I think we’ll be addressing it through our discounting process on a deal-by-deal basis working with our channel partners as the deals merit and they come to us and we decide to figure out how to work it together so we win.

Okay. And then -- I just -- I also, on services, if I can follow-up on, John, you talked about managed or consulting services, people come at you guys and asking you to do more and more of this. Is there any – do you have an ability to quantify that for us, or give us some idea for how that part of services is growing for you, I think it still is growing?

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.

Okay, we’ll move on to next question. Jeff Kvaal with Northland Capital, your line is open.

Yes, gentlemen, thank you very much and let me add to my congratulations to those who’ve come before me. I look forward to working with you Manny, and John, I don’t look forward to not working with you I guess is the way I would put it. Okay, could I ask, the product revenue growth, obviously we’ve been watching this for many years and asking about it every quarter, looks like it may be flat to down again in the next quarter. How long do you think it may be before the current -- let’s assume that the currency normalizes at these levels, how long do you think it might be before the product revenue would start to drift back up?

This is John, and I’m going to make an excuse, and lead with that, but given what we saw in America last quarter, where we had really solid rebound, not just in the million dollar deals, but the actual sales, if we have not seen those -- this is our opinion there, if we haven’t seen those currency, it would be – we wouldn’t be answering this question right now. So, we have to balance that. But the key for us is to keep focused on creating technology and security and the big drivers that we see, making sure that we execute on areas like the ACE opportunity, which we still believe is there, and if there is a number of deals going this quarter, then we will see results. That’s our focus, but meanwhile, there are some headwinds in between, obviously macro.

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 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. I mean, well, first of all, and we had this from our sales force -- sales management in North America and EMEA this week, I mean, they were very optimistic about our competitive position, so we don’t see that at all right now. We think we’ve got a great area there and we will continue, and it’s up to us to keep driving those solutions and innovation that Manny talked about and product revenue will fall.

And just to clarify, most of the innovation we are talking about here is not physical hardware, it’s actually software innovation, so customers can upgrade to that innovation, specifically as our -- within our support capabilities. We offer that opportunity to move toward – through the most recent software cycle. So we are not penalized by any means by not having the technology today, and when the additional software functionality becomes available, they will do an upgrade.

Thank you, gentlemen.

Thank you.

Next question, Rohit Chopra, your line is open.

Yeah, thanks for taking the question. And congratulations, John and Manny. I had a question again just about the end of the quarter and the softness, and I know you mentioned currency. But did you see anything related to competition, I know there is a few competitors that are out there who are a little bit desperate of maybe they were accounting for the weakness at the end of the quarter? Maybe that’s the first question. And the other question I had, and John, maybe you could help me out on this one, but it comes back to product growth and services growth, is foreign -- what’s the make-up of the services for the new ones or serviced, maintenance contract, are they mostly foreign? And the reason I am asking is, maybe the foreign buyer, are they sort of holding off on maybe some upgrades or some new purchases and they are just sticking with their existing solution for a little bit longer, just given the currency movement. Have you looked at 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 effect 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? A - Manuel Rivelo: 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 is 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.

Thank you.

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

Okay. Next question, Paul Silverstein, Cowen and Company. Your line is open.

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 [indiscernible] 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 continue through ’16, but I guess I’m trying to get a sense of the concentration risk from that one deal?

Okay. So, let me answer that as well as in my mind. So, I think in the last call, I talked about a couple of transactions more than a million. We talked about another transaction happening this quarter, millions plus. That’s the type of, we expect -- and remember this is a rollout, this is not something that you know we expect to see that throughout the fiscal. I am not saying every quarter we’ll see it, I am not committing that, but we expect to see that type of transaction happening as they roll out the Gi firewall to the network. And another thing I said was it through -- we think over through 2016. So, we don’t see any concentration, actually almost the opposite. And the main thing we want to do actually is make it work which we’re very happy with the way it’s gone into production and also to replicate it in the other --

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 historic 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.

Last question today then comes from Sanjiv Wadhwani, Stifel. Your line is open.

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.

Okay, thank you. Then that does conclude the call for today. You may disconnect your phone lines at this time.