Foundry Networks Q3 2006 Earnings Call Transcript

Foundry Networks, Inc. (FDRY)
Q3 2006 Earnings Call
October 24, 2006 5:00 pm ET

Executives

Jason Golz - IR, Financial Dynamics
Bobby Johnson - President and CEO
Tim Heffner - CFO

Analysts

[Scott Kate] - Lehman Brothers
Stan Kovler - Merrill Lynch
Mark Sue - RBC Capital Markets
Cobb Sadler - Deutsche Bank
Ken Muth - Robert Baird
Jason Ader - Thomas Weisel
Matt Robison - Ferris, Baker Watts
Natarajan Subrahmanyan - Sanders Morris
Eric Suppiger - Pacific Growth
Samuel Wilson - JMP Securities
Andy Schopick - Nutmeg Securities
Rich Church - Unterberg
Munjal Shah - Piper Jaffray
John Dabbs - [Bowdery Capital]

Presentation

Operator

Welcome to the Foundry Networks' Third Quarter 2006 Earnings Conference. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded. And I would now like to turn the program over to Mr. Jason Golz of Financial Dynamics. Please go ahead.

Jason Golz

Thank you, John, and good afternoon everyone. Thank you for joining us for the Foundry Networks' third quarter 2006 revenue results conference call. I am joined today by Bobby Johnson, President and Chief Executive Officer; and Tim Heffner, Chief Financial Officer of Foundry Networks.

Earlier this afternoon, the company issued a release reporting its third quarter revenue results. This release can be accessed from the Investor Relations section of Foundry's website at www.foundrynetworks.com. For reference, we have arranged for a taped replay of this call which may be accessed by phone. This replay will take effect approximately one hour after the call's conclusion today and will be available for seven days. The dial-in access number for this replay is 402-220-1157. This call is also being webcast live with a web replay also available. These may both be accessed from the IR section of Foundry's website.

Before we begin, I'd like to make a brief statement regarding forward-looking remarks. The call today contains forward-looking information regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business.

We refer you to the documents the company files periodically with the SEC, specifically the company's recent quarterly report on Form 10-Q and annual report on Form 10-K for the year ended December 31, 2005, as well as the Safe Harbor statement in the press release the company issued today. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Foundry assumes no obligation to revise any forward-looking information in today's call. Now I'd like to turn the call over to Bobby Johnson, President and CEO of Foundry Networks. Bobby?

Bobby Johnson

Thank you, Jason, and good afternoon everyone. Foundry posted record revenues of $118.8 million for the third quarter, an increase of 11% over last year's $106.6 million for calendar Q3, and an increase of nearly 10% over this year's calendar Q2. This is our best revenue quarter ever, a new record for us, surpassing our earlier $116.1 million quarter in calendar Q4 of 2005.

Other key financial successes during the quarter that I would like to highlight include number one, our book-to-bill ratio continued to be greater than 1. We set new record revenue records for Europe during the period. We benefited from a strong recovery in our Federal Government market during the quarter. Specifically, our Federal Government business rebounded from 13% of revenues in the second quarter to represent 20% last quarter.

Number 4. We had renewed strength in all Asian markets with a rebound in Korea and Japan, along with new records being set in some South Asian markets.

Number 5. We generated $20 million in cash in the quarter and we now have a strong cash position of $840 million.

Some key products and operational successes that I would like to highlight for the quarter include; number one, for the enterprise market, we began volume production shipments of two new modular systems in the FastIron SuperX family of power over Ethernet enabled distribution and core switches. These products were announced in calendar Q2.

The second operational highlight is that overall, our newer modular enterprise LAN switch families, the SuperX and the RX, grew 17% sequentially and now represent approximately 30% of our total product revenues.

The third operational highlight is that for the service provider market, revenues for the NetIron XMR and MLX MPLS router families grew sequentially as both the domestic and international customers began deploying these new platforms. We now have over 100 customers deploying these platforms. These products only began to ship in calendar Q1 of this year.

The fourth operational highlight is that in the application traffic management market, our chassis-based ServerIron platforms also performed very well, gaining traction in both enterprise and service provider customers with chassis revenues growing 50% from the prior quarter.

The fifth operational highlight is that during the September period, we announced a new family of entry-level ServerIron application and content management switches with an integrated web firewall security suite to meet the demand for secure and optimized delivery of growing Web and triple-play services in small and mid-size enterprise data centers. Offered at one of the industry's best entry prices, the ServerIron 4G features an integrated purpose-built Web firewall to protect Web-enabled enterprise applications against increasing application-intelligent attacks that may cause service distribution and compromise sensitive information and data.

In the sixth operational highlight is that overall our 10 Gigabyte Ethernet port shipments were up 71% sequentially. We believe our revenue results released today demonstrate the value of our core objectives, which include focus on product leadership, high-touch customer service, and intelligent investment, specifically designed to create future opportunities. I'll now turn the call over to Tim Heffner Foundry's Chief Financial Officer.

Tim Heffner

Thank you, Bobby and good afternoon everyone. For the third quarter ended September 30, 2006, Foundry posted record quarterly revenue of $118.8 million, as compared to $108.4 million in the second quarter of 2006, and compared to $106.6 million in the third quarter of 2005. This is an increase of 10% sequentially from the previous quarter, and an increase of 11% from the same quarter last year.

We're pleased with our strong performance and look forward to a strong Q4. During the third quarter of 2006, Federal spending resumed again and our Federal business increased sequentially, representing 20% of our total revenue compared to 13% in the previous quarter.

Our overall domestic revenue was 67% of the total business and our international business represented 33% of the total. This represents a slight improvement in our international business compared to last quarter and a significant improvement from the 28% we saw in the third quarter of last year.

Sales in Japan this quarter increased in absolute dollars but remained at approximately 9% of total revenue. This was primarily due to a modest recovery from the seasonal weakness we saw in the June quarter.

Our enterprise business was, again, our primary source of revenue. Enterprise customers accounted for approximately 80% our total revenue for the third quarter.

Revenue from our chassis-based products in Q3 increased slightly compared to the second quarter representing 71% of revenue. As previously announced, the Special Committee of Foundry's Board of Directors has been conducting a review of the company's practices relating to the granting of stock options.

The Special Committee has hired independent legal and financial experts to conduct the investigation. The company issued an 8-K on September 22, 2006, acknowledging that the investigation will not complete, had determined that a restatement would likely be necessary for the years 2000 to 2003. Due to this fact, we have not included financial statements in our Q3 release.

The company intends to publish financial statements for the quarterly period ended September 30, 2006, and to file its quarterly report on Form 10-Q following the completion of the Special Committee's review and the implementation of any findings. The Special Committee's review will not be completed in time for the company to file its Form 10-Q quarterly report for the quarter just ended by the SEC deadline of November 9, 2006.

At the end of Q2 -- I mean, Q3, our cash and investments totaled $840 million, which is an increase of $20 million for the quarter and an increase of over $140 million over the past 12 months. Days sales outstanding were 61 days, essentially flat to the prior quarter. As Bobby mentioned, our book-to-bill ratio was again greater than 1. We ended the September period with 782 employees. We are continuing to hire as the company grows and expect to add more employees in the fourth quarter, mostly in our sales organization. With that, I'll now turn the call back to Bobby.

Bobby Johnson

Thank you, Tim. As I mentioned earlier, we will continue to invest in our business, introducing new products and solutions to meet the demands of increasingly complex, large enterprise and service provider environments. Our goal is to not only fulfill the demands of those customers, but to be a leader in innovative technology and offer solutions that provide high value in both price and performance. As we have invested in our R&D and sales organizations, we have seen a corresponding increase our business performance.

We're optimistic that in the years ahead, even greater business returns can be seen from our current and future investments. At this point, I'd like to turn it over to the operator for our question-and-answer period.

Question-and-Answer Session

Operator

(Operator Instructions). And it looks like our first question comes from the site of Jiong Shao with Lehman Brothers. Go ahead, please. Please Mr. Shao, your line is open.

[Scott Kate] - Lehman Brothers

Hi, this is [Scott Kate] actually calling for Jiong Shao. Hey guys. I was really impressed you just put out your products versus service revenue?

Bobby Johnson

Products about 99 million with the balance being service.

[Scott Kate] - Lehman Brothers

Okay. And then with respect to the Federal and also Japan, can you describe what was driving the bounce back there and how sustainable you think it might be going forward?

Bobby Johnson

Okay. For federal, what drives a lot of our budget -- these are 2 things. One is our win rate, and second thing is the budget preparation environment. In general, win rate continues strong in Federal and budget appropriations came in calendar Q3. So those are the factors with the Federal as well as we continue to increase our headcount in Federal for the long-term. For Japan, once again it was a little bit of seasonality in Q2. To reiterate, calendar Q1 is Japan's virtual Q4. That is, their end of year is calendar Q1. So, we typically see a strong Q1 followed by a little bit of softness in calendar Q2. So this is returning back to seasonality along with a traction of many of our neural platforms in the Japanese market.

[Scott Kate] - Lehman Brothers

[Understood].

Bobby Johnson

Excuse me.

[Scott Kate] - Lehman Brothers

Business grew sequentially in the December quarter, is that something that you feel was unique last year --

Bobby Johnson

Could you repeat?

[Scott Kate] - Lehman Brothers

Or were they different?

Bobby Johnson

Could you repeat?

[Scott Kate] - Lehman Brothers

For the Federal business, you grew at last year sequentially 2%. Is that something that was unique to last year or was the environment different from Q3 to Q4?

Tim Heffner

I'm not quite sure. There is always concerns over the appropriation environment, that is the budgeting environment, and overall we expect Federal to remain strong as long as budget cycles are favorable.

[Scott Kate] - Lehman Brothers

Okay, thank you very much.

Operator

Thank you. Our next question comes from the site of Tal Liani with Merrill Lynch. Go ahead please.

Stan Kovler - Merrill Lynch

Thanks for taking the questions. It's Stan Kovler for Tal. Just wondering if what you're thinking about going forward, in the fourth quarter, especially in the North America business, if you look at on a sequential basis it looks like the North America business outside of the Federal business appear to be down, and just wondering how the business is tracking. You mentioned that the books-to-bill above 1. I am not sure if you can comment on geographically, but just give us some color on what you are seeing in that market?

Bobby Johnson

We still are seeing a very robust North American market. We have been very clear before that we do prioritize Federal shipments. A lot of our Federal orders come in, what's called rated, that is they have to ship in advance of other products for either national defense or national security reasons. So, Federal tends to get a great deal of priority on shipments and it skews people's perceptions of how the revenue stack or the order stack in reality is.

Stan Kovler - Merrill Lynch

Thanks. And there is another question on the sales or overall headcount. In terms of personal headcounts, it seems like the additions were slightly slower than what you have typically done in prior quarters? Are we reaching a point where you are, sort of, getting closer to diminishing returns for headcount addition, particularly on the sales front? How should we think about that? Thank you.

Bobby Johnson

No. I think there is two dynamics in Q3, one is summer quarter. So, we were a little bit slower to hire in the summer quarter. But, additionally, we decided during the summer quarter to more or less do a digestion period, that is we had hired a lot of people over the last three or four quarters. We decided to make sure that we have really focused on giving them all the speed and more focused on absolute performance versus taking time away from management on recruiting. And is still our intent to continue to hire and we would love to hire at an accelerated rate in all areas.

Stan Kovler - Merrill Lynch

Thanks. And just lastly the housekeeping item. I'm wondering if you can give us the amount of new customers you had for the quarter. That's all from me. Thank you.

Bobby Johnson

318, we are now over 10,400 customers or so.

Operator

Thank you. Our next question comes from the side of Mark Sue with RBC Capital Markets. Go ahead please.

Mark Sue - RBC Capital Markets

Thank you. Any thoughts on what the earnings might have been during the quarter? I'll ask a different way.

Bobby Johnson

Thank you, Mark.

Mark Sue - RBC Capital Markets

In December of '05, you did 116 million, earnings were $0.14. Would it be reasonable to assume were at least $0.14 this time around?

Tim Heffner

I don’t think we can give you degree of precision. I think, historically Q3 we see our expenses, in particular in the sales and marketing areas to be slightly less, but that’s about all the color I can give you right now.

Mark Sue - RBC Capital Markets

Okay. May be then on revenues, historically you missed a few and also beat a few December quarter revenues with the book-to-bill where it is and the new product momentum. Are there any reasons why December revenues may not grow at the same sequential rate that you just posted? In another words, you have a higher level of confidence this time around versus a year ago and the opportunity to grow revenues sequentially in December?

Bobby Johnson

I would say that we're very optimistic, given both an increased sales force headcount and newer products. A lot always depends upon Federal budgets and worldwide economies and worldwide events. But in general, were very optimistic.

Mark Sue - RBC Capital Markets

Got it. And so we should not assume that should dip in the December quarter. It should be at least flat to up for the December quarter?

Bobby Johnson

I am optimistic, but I don't know quite all of the budget cycles. We had a few positive surprises, a few negative surprises, so --

Tim Heffner

In prior years, not this quarter.

Bobby Johnson

Right, in prior years. So, although overall we are optimistic for the business, we're always cautious about our concentration in Federal. But right now, we are optimistic that federal, given a budget environment, it should do at least okay for us.

Mark Sue - RBC Capital Markets

More optimistic than last year?

Bobby Johnson

No, I wouldn't say I'm more optimistic, I mean, for a Federal loan. I would say overall for the entire business, I'm very optimistic.

Operator

Thank you. Our next question comes from the site of Cobb Sadler with Deutsche bank. Go ahead please.

Cobb Sadler - Deutsche Bank

Thanks a lot. I have a question on the Asian business, obviously strong. Was it general sweetener in the enterprise market, or do you have some carrier RFPs that you may have won that are starting to pay dividends?

Bobby Johnson

Generally, in the Asian market we have a bigger service provider market than in some other sectors. However, we had significant wins in both, the enterprise and the service provider markets that showed strength in the Asian markets. So, I would say it was a pretty good balance, but both were strong for Asia in the quarter.

Cobb Sadler - Deutsche Bank

Okay, great. And on the XMR router, I think you talked about 100 customers and maybe talking about breaking out mid next year as a percent of revenue. Do you think based on what you've seen so far, do you think that you will be breaking out, you are satisfied with the traction there? And also, could you tell us what type of customers, is it tier 3, 2s, or 1s that are buying -- that at least trying the product now?

Bobby Johnson

Okay. So, what we've said is, it's really the second half of next year where we are the most optimistic about the XMR and the MLX. So, it will be sometime in the second half where we're thinking that it's really going to start significantly adding. Overall, I am very pleased with the progress we've made with the XMR and the MLX. We have several differing customers for -- that are buying the XMR and MLX. They are tier 2, tier 3. I would say that there are some tier 1s that are trying the product, and we'll see how progress goes here in the next one to two quarters in tier 1s. The thing that's not really seen here is the -- just the existence of the XMR and the MLX has actually in some tier 1s driven revenue in our other product lines inside those environments. So, we are actually -- have sold other products lines of concentration and aggregation devices in the service networks of some tier 1s just because of the mere existence of the XMR and the MLX. So, overall, we're very pleased with the overall impact to the business.

Cobb Sadler - Deutsche Bank

And the last question. You're not breaking that out yet as a percentage of revenue?

Bobby Johnson

No, not yet.

Cobb Sadler - Deutsche Bank

Thanks a lot.

Operator

Thank you. Our next question comes from the site of Ken Muth with Robert Baird. Go ahead please.

Ken Muth - Robert Baird

Hi. The other area that seems to be doing quite surprisingly well is your application traffic management. You clearly have had a lot of new products announced in that space. Is it kind of a double positive where you have got newer products and the sales force going, or kind of things just some backlog and they are finally popular, so they grew 50% sequentially?

Bobby Johnson

Overall, I think there's several different factors, including a double positive. I think what we want to do is really grow all sectors together. For the application traffic management sector, we do use it as a differentiator for parts of our other product line in both service providers and enterprises. So overall, what we want to see is our entire stack of all product lines move up in both market sectors.

Ken Muth - Robert Baird

And is it fair to say right now that it is probably more service provider driven than enterprise, and enterprise is now starting to come along in that specific category?

Bobby Johnson

It's not so simple. It's both. What we are known for is, the very big scalability environments, and we've got the top tier portals and service providers that have standardized and survived. We also have some very large banks, government agencies also that have standardized and survived.

Cobb Sadler - Deutsche Bank

Okay. And then, Tim, just quickly, as all these kind of newer products come in the fold and are coming in at different rates of take here, but how would this kind of generically improve or impact gross margins? Is it still too low enough of a run rate where it would be a negative impact or are they big enough now across all these new products, that would be a positive impact on gross margins?

Tim Heffner

I think all that we're prepared to comment on at this time is that our gross margins are not moving material -- materially in either direction and they are within the range that we have stated before that our expectations are. Other than that, I can't give you a whole lot more color at the moment.

Ken Muth - Robert Baird

Great. Okay, guys. Thank you.

Operator

Thank you. Once again, we would like all participants asking questions to limit yourself to one question and one follow-up due to time constraints. And our next question comes from the site of Jason Ader with Thomas Weisel. Go ahead, please.

Jason Ader - Thomas Weisel

Thank you. Hey, guys. On the question asked earlier your confidence level moving into Q4 versus last year. When you are moving into Q4 off of very strong federal quarter, you are having some good momentum on the enterprise side. It just seems to me like the enterprise side at least in North America has kind of decelerated a little bit if you look at the year-over-year growth rates just for North American enterprise over the last three quarters. And my sense is that, you are just a little bit further down the road on a product cycle with the RX and the SuperX. And therefore, I was just kind of curious as to whether at least on the enterprise side you have the same level of conviction as you did, let's say, a year ago that you can grow pretty strongly from Q3 to Q4?

Bobby Johnson

Well, we remain optimistic. A lot will depend upon the size of the Federal business and how many of the orders get rated as they come in at the last minute. We will have a finite amount of product and we would obviously like to distribute the product fairly among our customer bases. But in reality, in the later days of the quarter, Federal gets an unfair proportion of shipments due to the defense and security ratings. I wish I could provide more color on that, but that is the reality.

Jason Ader - Thomas Weisel

Okay. And just a follow-up on that though. I guess, the enterprise side though, from Q3 to that Q4 last year, if my numbers are right, it grew pretty strongly. It grew about -- U.S. enterprise grew about $6 million -- actually, sorry, about 4 million, 4 to 5 million sequentially, where it was kind of flat from Q2 to Q3. Is that a reasonable type of growth rate to assume this year, Q3 to Q4, that type of level, kind of a magnitude of what 4 to 5 million sequentially, or is that for any reason -- is there any reason it would be different, putting aside federal For a second, but just looking at the enterprise business on its own versus last year, where you had, I think a little bit more juice in terms of the product cycle with the RX just coming out?

Bobby Johnson

Well, I think there's a couple of different dynamics. One is, we cannot confuse bookings with shipments, okay. That's the biggest concern here. Secondly, a lot will depend upon the timing of the orders, the ratings of the orders, overall I remain optimistic for all regions.

Jason Ader - Thomas Weisel

Does it create customer service issues if you can't deliver on your enterprise -- to your enterprise customers, doing at some point three customer service issues?

Bobby Johnson

Yes, but I believe most people know and realize if they get orders in late, the reality is there's a probability of it happening next quarter.

Jason Ader - Thomas Weisel

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the site of Matt Robison with Ferris, Baker Watts. Go ahead please.

Matt Robison - Ferris, Baker Watts

I have a quick one for you, Tim. How much cash from option exercise at the end, how much from interest income? And then on the Federal was -- sometimes in the December quarter, with company that sell in the Federal, if it comes late in the quarter you get some more activity in December if the orders come in like that. Is that what we saw here? I guess I snuck in three questions there.

Tim Heffner

Let's start with the cash. Tax effect of the interest would have been about 6 million, gross with about 9. There wasn't a lot from options, to be from running the business [12] was the balance. And then, last part of your question, I don't know if I quite know what --

Matt Robison - Ferris, Baker Watts

Obviously, the fiscal year for Federal is September, but you see companies sometimes have good December quarters. If the Federal orders come in late or the budget process comes in late, they flop over into December, is that what we saw last year, and is that the kind of dynamic we might see this year? Because Federal was kind of late in the quarter this year, wasn't it? Or no?

Tim Heffner

It did start -- the funding, we saw the funding began to flow in the middle of August. So, if you want to call that late, yes, it didn't start from the beginning. You're right on that. Could we see similar to what we had last year? Sure. I don't think we're prepared to give you precision and say that our Federal business is absolutely going to be up. But, Bobby has already said that we're optimistic in all areas of our businesses. We are showing strength.

Matt Robison - Ferris, Baker Watts

Okay, thanks.

Operator

Thank you. Our next question comes from the site of Subu Subrahmanyan with Sanders Morris. Sorry if I butchered your name.

Natarajan Subrahmanyan - Sanders Morris

Thank you. My question is on cash generation. You generated $20 million in cash this quarter, and then on a low of revenue base, you had about a $30 million cash generation last quarter. I am just trying to figure out what was the difference given DSOs were relatively flat? And is there any kind of margin implication in terms of pricing from that? My second question, 10-Gigabit is a percentage of overall revenue. If you could just tell us what that number is?

Tim Heffner

Okay. I think I will comment on the gross margins. We haven't seen any movement materially now that its up or down. So, our gross margins are holding solid. We haven't talked to the operating margin line at all. I don't know that -- I think we had more options exercised in the prior quarter, which would have given us more cash. We didn't have a lot of activity this quarter

Bobby Johnson

And working capital.

Tim Heffner

And working capital, yes.

Natarajan Subrahmanyan - Sanders Morris

10-Gig as a percentage of revenue?

Tim Heffner

Well, we don't break it out that way, because there are different things. I reported on the port count being up 71% sequentially for 10-gig, but how do you -- there is ports and there is chassis and there is other ancillary things. So 10-gig is -- has a tremendous impact on the overall business. But we don't break it out because there's so many ancillary devices, sometimes we ship 10-gig with a current chassis, sometimes we ship only modules. So it's really skewed.

Natarajan Subrahmanyan - Sanders Morris

Got it. And just one clarification. Tim, did you say interest income was 9 million for the quarter?

Tim Heffner

9 million gross tax effective, take some change.

Natarajan Subrahmanyan - Sanders Morris

Great. Thank you.

Operator

Thank you. Our next question comes from the site of Eric Suppiger with Pacific Growth. Please go ahead.

Eric Suppiger - Pacific Growth

Good afternoon. Say, may be you could just give us a little bit of clarity on the North American non-Federal. It looks like it was down. There's a lot of concern out there. Can you just give us a feeling for how bookings compared to the previous quarter?

Bobby Johnson

We don't typically break open the book-to-bill other than its been greater than 1. I don't see anything that tells me that our North American business has come to an end.

Eric Suppiger - Pacific Growth

You described it as robust. Can we presume that the bookings would have grown sequentially by that -- by that description?

Bobby Johnson

The thing is, I can only go back and state that you cannot necessarily take the revenue shipments and break them out in presupposed, but the bookings followed exactly those percentages. I would state that the bookings for which you're talking about were stronger than what the revenue might suggest. That's the implication.

Eric Suppiger - Pacific Growth

Okay. But no further than that. Can you talk a little bit about lead times? Did lead times escalate at the end, because you were shipping a lot of the Federal business?

Bobby Johnson

It depends upon product mix. The good thing is, as I mentioned, we had a 71% sequential 10-gig port increase. So, we have experienced bubbles in some of our supply chain. Also, our ServerIron business, in certain -- in categories of the ServerIron business was up sequentially very strong. So we do have some bubbles in the supply chain, but I believe those either have been corrected or will be corrected shortly.

Eric Suppiger - Pacific Growth

And then just following up on the last question that I had. Can we assume that the business that you would have deferred in light of the priority -- prioritizing Federal business, the order that got pushed into the December quarter, have they largely closed at this point?

Bobby Johnson

When you say close, are you talking about have they shipped?

Eric Suppiger - Pacific Growth

They shipped, yes.

Bobby Johnson

I would think some percentage of them certainly would have, a lot depending upon the product mix. As I mentioned, we might have some shortages in some areas.

Eric Suppiger - Pacific Growth

Very well. Thank you.

Operator

Thank you. Our next question comes from the site of Samuel Wilson with JMP Securities Corp. go ahead, please.

Samuel Wilson - JMP Securities

Sure. Just a quick question on the business in Japan. In terms, obviously, you saw strong activity both in the enterprise -- excuse me, in Asia you saw good business in enterprise and service providers. Specifically in Japan, what trends are you saying there? Are you starting to see similar activity out of service providers or is that pretty much matching what others been [shipping things], and the things are slow there?

Bobby Johnson

No, we have some service providers that just keep ticking away, and we're winning new accounts. So, we were very happy with our overall Japanese performance. Not that I don't want more, but given the state of product portfolio, the state of size of team, the state of calendar Q3, I was overall happy with the performance in Japan.

Eric Suppiger - Pacific Growth

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the site of Andy Schopick with Nutmeg Securities. Go ahead, please.

Andy Schopick - Nutmeg Securities

Bobby, I'd like to ask you question here about the outlook for Federal, especially in view of the pending elections, the potential of some change in Congress. Did you get any sense that anything was accelerated in terms of decision making or do you have any concerns about what the outlook for Federal could be in the upcoming December quarter, the government's first fiscal quarter as a result of pending elections?

Bobby Johnson

I don't have any insight into some of those aspects. Historically, if we take a look back over the last couple of years, it bubbles in our Federal business. Most negative bubbles related to appropriation bills and/or shift from buying IT products to buying bullets and bombs. Right now, I have no insight into supply inventory and overall priorities. I do believe that there is going to be continuing investment in security environments, intelligence environments. I believe there will be continuing investment in our war fighting capabilities, both from a strategic level and then some topical levels. I think, there is opportunity for Foundry to continue to expand in Federal and we will be subject to Federal budget constraints. But it's a market that I like to participate in from a couple of different angles. One is, they need the type of products Foundry builds; but secondly, number of product of our U.S. Army family. And there is some personal satisfaction I get out of selling to places that I grew up in, such as Fort Bragg, North Carolina. So --

Andy Schopick - Nutmeg Securities

Just wanted to ask the question, because obviously there's a potential for some surprise her.

Bobby Johnson

There is a potential, we are in all sectors, but I believe there is opportunity, there is need, and I believe it's overall a good opportunity for technology vendors.

Andy Schopick - Nutmeg Securities

Thank you.

Operator

Thank you. Our next question comes from the site of Rich Church with Unterberg. Go ahead, please.

Rich Church - Unterberg

Thank you. Bobby, you mentioned shortages. I'm wondering, could you expand on that comment? Is that opponent or just a lack of capacity? And if the latter, do you plan to expand your capacity?

Bobby Johnson

We've actually over the last year doubled our capacity. So it's not a lack of capacity. So, what I was talking about is just product mix. As we've introduced new products, we've had to find a fine balancing act between old and new. And as I mentioned, we had a 71% sequential growth in 10-gig ports. So it's always a balancing act there. There's nothing major. It's something we had to deal with for the last 10 and a half years as we introduced new products.

Rich Church - Unterberg

Okay. And then could you comment on activities in October thus far, aside from the shipments that were fulfilled with regard to the rated product, the Federal product? Aside from that business, how is the activity going?

Bobby Johnson

Aside from -- okay, are you talking about within Federal or outside of Federal?

Rich Church - Unterberg

Just in general, beyond -- beyond just fulfilling against product that was held up because Federal got priority. Are you seeing -- are you seeing -- how linear is the December quarter looking thus far? And just general trends activity in October?

Bobby Johnson

I'm overall pleased and optimistic. I mean, I don't want people to -- I don't want to imply a forecast for the quarter. But all indications are that, there is demand for our product.

Rich Church - Unterberg

Okay. So demand could imply a sequential improvement?

Bobby Johnson

I'm not going to forecast the quarter. I will say I remain optimistic. There is tremendous interest in our products. Now, it's obviously our job to compete and win that interest level, and also some of our deals are not just one quarter based, in that some of the level of interest we have won't come to fruition and for six to 12 months. But overall, I remain very optimistic about the short term, but I'm really focused on the long term.

Rich Church - Unterberg

And at what point do you get optimistic enough to provide guidance?

Bobby Johnson

We haven't formulated a specific policy toward returning to guidance. So, I wouldn't want to say that we will or won't. We haven’t formulated a policy on that. I mean, our policy has been in the most recent future, is to not provide guidance. That is, specific guidance.

Rich Church - Unterberg

Okay, thanks.

Operator

Thank you. Our next question comes from the side of Munjal Shah with Piper Jaffray. Go ahead please.

Munjal Shah - Piper Jaffray

Hi. This is Munjal for Troy Jensen. Just a couple of questions. Could you give us what is the percentage of revenues from the Application Traffic Management Business?

Bobby Johnson

Yeah. I would say, it would be in round numbers approach about 15% for the quarter. I don't have the exact numbers in front of me.

Munjal Shah - Piper Jaffray

Then may be just follow up on that, as to in the past it has been in the 10 to 12, like last quarter you mentioned that would be in the 10% to 12% range. And you mentioned there was a growth rate of about 50% this quarter?

Bobby Johnson

50% in the chassis based products.

Munjal Shah - Piper Jaffray

Okay. Thanks for the clarification. And one more thing. Can you just give us -- housekeeping question, what's the percentage of revenues from the Europe region and Asia Pacific outside of Japan?

Bobby Johnson

I'll turn to Tim. I don't have all of that in front of me.

Tim Heffner

I don't know if I have --

Bobby Johnson

Do we break it out by region to that?

Tim Heffner

We have not in the past. We've said that the international business broke up a third Europe, a third Japan, and a third rest of Asia. We did 33% this quarter internationally, we said 9% was Japan. We said that our Asian business was up.

Bobby Johnson

And then we had a record for Europe. So it would be hard to break it up one-third, one-third, one-third.

Tim Heffner

Right.

Munjal Shah - Piper Jaffray

Yes. I'll make estimates based on that. Thank you.

Tim Heffner

Yes.

Munjal Shah - Piper Jaffray

Thank you.

Operator

Thank you. And our final question comes from the site of John Dabbs with [Bowdery Capital]. Go ahead please.

John Dabbs - [Bowdery Capital]

Thank you. Just couple of quick questions. Some of the other companies that have these option questions have been able to finalize and go forward. What's holding you back from getting this taken care of? And once you get past it, you've had a lot of comments about buybacks and dividends and (inaudible) up to 840 million in cash. Can you commit to an aggressive shareholder friendly program once you get the option question behind you?

Bobby Johnson

Yeah. On the stock option, I don't think that we are behind relative to others. I think we might have gotten started later than other companies and therefore they may have finished earlier. We think we're making good progress. And I can't give you a precise date when that will be finished. But we do recognize that we are all well aware of the urgency -- the sense of urgency because our filings are not current with the SEC and there is a real sense of urgency to get those current. So the sooner we can get it done, we will. In terms of shareholder friendly program, I think we have to wait until all the option stuff is done before we make those decisions. We've actually tabled that discussion at the moment because we can't do anything.

John Dabbs - [Bowdery Capital]

Okay. So you're not willing to say -- once you get it behind you, you're committed to pushing some of these programs?

Bobby Johnson

Well, we're committed to as a Board of Directors to considering all options, of which buyback is one of several that we've been considering prior to the options investigation.

John Dabbs - [Bowdery Capital]

Well, I hope you get it behind you soon, thanks very much.

Tim Heffner

Thank you.

Bobby Johnson

Thank you. We do too.

Operator

Thank you. This concludes the Q&A session for today's call. I'll now turn it back over to our speakers for any closing remarks.

Bobby Johnson

Okay, thank you. I would like to thank everyone for joining us and taking time to participate this afternoon. I do want to reiterate, this was a record for us by $2.7 million, and we do look forward to updating everybody in approximately 90 days. Thank you. Take care.

Operator

This concludes today's conference call. You may disconnect anytime, and have a great day.

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