Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

John Eldridge

Andy Reinland - Chief Finance Officer and Executive Vice President

John McAdam - Chief Executive Officer, President and Executive Director

Manuel F. Rivelo - Executive Vice President of Strategic Solutions

Karl D. Triebes - Chief Technical Officer and Executive Vice President of Product Development

Analysts

Brian Marshall - ISI Group Inc., Research Division

Natarajan Subrahmanyan - The Juda Group, Research Division

Ehud A. Gelblum - Citigroup Inc, Research Division

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Brian John White - Cantor Fitzgerald & Co., Research Division

Rohit N. Chopra - Wedbush Securities Inc., Research Division

Justin Jordan - Goldman Sachs Group Inc., Research Division

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Timothy Long - BMO Capital Markets U.S.

F5 Networks (FFIV) Q1 2014 Earnings Call January 22, 2014 4:30 PM ET

Operator

Good afternoon, and welcome to the F5 Networks First Quarter 2014 Financial Results Conference Call. [Operator Instructions] Also, today's conference is being recorded. If anyone has any 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.

John Eldridge

Thank you, and welcome, all of you, to our first quarter fiscal 2014 conference call. The speakers on today's call are John McAdam, our President and CEO; Andy Reinland, Exec VP and Chief Financial Officer. Other members of the executive team are also with us to answer questions following John and Andy's prepared comments.

If you have any follow-up questions after the call, please direct them to me at (206) 272-6571. A copy of today's press release is available on our website at f5.com. In addition, you can access an archive version of today's live webcast from the Events Calendar page of our website, through April 23. From 4:30 p.m. today until 5:00 Pacific time, January 24, you can also listen to a telephone replay at (866) 452-2104 or (203) 369-1210.

During today's call, our discussion will contain forward-looking statements, which include words such as believe, anticipate, expect and target. These forward-looking statements involve certain 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, described in detail on our SEC filings.

Please note that F5 has no duty to update any information presented in this call.

With that, I'll turn the call over to Andy Reinland.

Andy Reinland

Thank you, John. In the first quarter of fiscal 2014, we continued to see solid returns on the investments we made last year. The growing demand for our new hardware and software products, positive response to our recently introduced Synthesis architectural vision and our new pricing models, all led to above-expected sales in each of our major geographies.

Revenue of $406.5 million was above our guided range of $390 million to $400 million, an increase of 3% from the prior quarter and 11% year-over-year. GAAP EPS of $0.87 per share was above our $0.81 to $0.84 guidance. Non-GAAP EPS of $1.22 per share also exceeded our guided range of $1.17 to $1.20 per share.

Product revenue of $218.6 million grew 3% sequentially and 7% year-over-year, representing 54% of total revenue. Service revenue of $187.9 million also grew 3% sequentially, 17% year-over-year, and accounted for 46% of total revenue. Accounting for 56% of the total, revenue from the Americas was up 6% from the first quarter of fiscal 2013. EMEA, which represented 24% of revenue, grew 17% from the first quarter of last year. APAC accounted for 15% of revenue and grew 19% year-over-year and Japan revenue, which grew 17% from a year ago, was 5% of total revenue for the quarter.

Enterprise customers represented 61% of sales during that quarter. Service providers accounted for 24% and government sales were 14%, including 7% from U.S. Federal.

In Q1, we have 3 greater than 10% distributors: Ingram Micro, which represented 17.9% of total revenue; Avnet, which accounted for 14.3%; and Westcon, which accounted for 13.5%.

Our GAAP gross margin in Q1 was 82.1%. Our non-GAAP gross margin was 83.4%. Our non-GAAP gross margin declined sequentially, a result of lower service gross margin, which reflects our increased investment in consulting, while our non-GAAP product margin remained essentially flat with Q4.

GAAP operating expenses of $224.4 million were within our target range of $219 million to $226 million. Non-GAAP operating expenses were $193.4 million. GAAP operating margin was 26.9%. Our non-GAAP operating margin was 35.9%. Our GAAP effective tax rate for Q1 was 37.8% and our non-GAAP effective tax rate was 35.1%.

Turning to the balance sheet. Cash flow from operations was $158.9 million. In Q1, we repurchased slightly more than 2.4 million shares of our common stock at an average price of $82.35 for a total of $200 million.

We ended the quarter with approximately $1.24 billion in cash and investments. With the addition of $500 million authorized by the board for stock buyback at our most recent board meeting, approximately $781 million remains authorized under our share repurchase program.

DSO at the end of Q1 was 49 days. Inventories were $19.1 million. Capital expenditures for the quarter were $5 million. Deferred revenue increased 18% year-over-year to $567.7 million. We ended the quarter with 3,520 employees, an increase of 165 from the prior quarter.

Based on growing demand for the new products we released in fiscal year '13, the strength of our security offerings, solid momentum with our Traffix Diameter solutions and positive customer response to our Synthesis architectural vision, we feel very confident about our ability to continue to grow the top line and anticipate continued sequential growth through the remainder of the fiscal year.

For the second quarter of fiscal 2014, our revenue target is $408 million to $418 million. We expect Q2 GAAP and non-GAAP gross margins to be consistent with Q1. GAAP gross margin is anticipated to be in the 82% range, including approximately $4 million of stock-based compensation expense and $1.7 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 $226 million to $233 million. This includes approximately $31.5 million of stock-based compensation expense and $0.4 million in amortization of purchased intangible assets.

For Q2, we are forecasting a GAAP effective tax rate of 38% and a non-GAAP effective tax rate of 35%. Our GAAP EPS target is $0.87 to $0.90 per share. Our non-GAAP EPS target is $1.23 to $1.26 per share.

We plan to increase our headcount by over 100 employees in the current quarter. We estimate DSO will be in the high 40-day range. We expect inventory levels within a range of $20 million to $22 million. And we believe our cash flow from operations will be at or around $80 million, reflecting the large sequential increase in our federal tax payments that we normally incur in our fiscal second quarter.

With that, I will turn the call over to John McAdam.

John McAdam

Thanks, Andy, and good afternoon, everyone. I was very pleased with our performance in Q1. The improved product revenue growth that we experienced in the second half of fiscal 2013 gained more momentum in our first quarter of fiscal year 2014. All our major regions met or exceeded their sales internal forecast.

From a sales perspective, the star of the quarter was the EMEA region where we saw strong sales growth across most of the region. The Americas region had another strong quarter and a majority of territories in our Asia Pacific Japan region also delivered solid results.

Once again, our Services business produced excellent results, including a significant increase in deferred revenue, which grew approximately 7% sequentially over the last quarter and is now over $550 million.

I was very pleased with the sales momentum we are seeing as a result of the extensive product refresh we introduced during fiscal 2013. The new product line already accounts for the majority of our ADC sales and have equipped our salesforce and partner channel with the most functional and competitive ADC solutions in the market. These new products, combined with our new pricing and software tiering strategy, good-better-best, are proving to be very popular with our customer base and very competitive in new business opportunities.

It is early days with the good-better-best go-to-market model, but initial sales have exceeded our internal expectations and the most functional tier, the best category, are proving to be the most popular which could increase our software sales as this trend continues.

The Cisco ACE install base continues to be a significant replacement opportunity and Q1 was another solid quarter, with a large number of project wins. Our competitive win rate in this area continues to be extremely high. As I mentioned before, we continue to see the pattern where our customers tend include additional functionality including security access control and application acceleration. And we are already seeing examples for the new range of F5 products, combined with the good-better-best pricing strategy, reinforces this trend.

We introduced our Synthesis architecture for software-defined application services last quarter. the F5 Synthesis architectural vision has been very well-received by our customers, our channel partners and has gained wide support from technology and industry leaders. Synthesis helps customers improve service velocity and accelerates time-to-market through automated provisioning and intelligent orchestration of application services. The Synthesis architecture is based on an elastic, high-performance fabric which reduces the cost and complexity of deploying software-defined application services across all types of systems and environments. These environments include software-defined networking, virtual infrastructures, traditional on-premise data centers and both public and private clouds.

We had another solid quarter with sales of our security solutions. Security continues to be the major driver of our business with strong sales across the security solutions portfolio, including ASM, APM and AFM.

We are also building out 2 world-class security operations centers in Seattle and Tel Aviv to support a new online security service from our Versafe acquisition. Versafe adds some very strategic solutions to our security portfolio. The WebSafe and MobileSafe services include state-of-the-art technology for Internet anti-fraud, anti-phishing and anti-malware solutions. We plan to formally launch the subscription base -- this subscription-based service and RSU -- RS issue in February and we will be announcing the availability of WebSafe and MobileSafe services, including a channel partner program. We have already seen significant amount of interest in these subscription-based services.

We will also be announcing a new Secure Web Gateway solution at RSA and, obviously, we will publish more details of the event.

We experienced strong sequential and year-over-year growth in sales to the service provider market last quarter. We won several large contracts for traffic management and signaling delivery controller applications related to 4G/LTE deployment. We recorded a record quarter of purchase orders for our Traffix SDC solutions, including sales to Tier 1 service providers in both Europe and in the U.S.A.

Actual revenue in Q1, from the SDC sales, was relatively modest, but the increase in orders bodes well for revenue growth in future quarters. In addition, we are starting to see an increase Carrier-Grade NAT wins now that we have enhanced the functionality and feature set of our Carrier-Grade NAT solution.

I'm very excited about our technology direction and the proposed deliverables on our product roadmap in the short, medium and long 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 application services.

Just this week, our product development team have delivered a new TMOS Vancouver release to manufacturing. TMOS Vancouver is a very major release and includes over 130 significant new features. These features include a Secure Web Gateway solution, major performance enhancements to our virtual ADC software and utility billing features. Support for new hardware architectures, major enhancements to our service provider products, including the G.I. firewall, the policy enforcement module and our Carrier-Grade NAT solution. Vancouver, under our most recent version of BIG-IQ, also includes significant improvements to our centralized management solution for our firewall solutions: ASM, DoS protection and AFM.

As far as the outlook is concerned, Andy indicated that we continue to expect to deliver sequential revenue growth this quarter of fiscal 2014. Obviously, we remain cautious given our experience from the March quarter last year. Having said that, we feel very positive about our market opportunities, our competitive leadership and the overall trends we are seeing with our business. Our pipeline for future business is very strong and the market drivers continued to be robust. We believe we have several tangible growth drivers for our business, including the new product refresh, the momentum in our security business and the increasing range of solutions in our security portfolio. The opportunity has been presented with 4G and LTE rollouts for our consolidation strategy and the competitive leadership of our Traffix' SDC solutions.

In addition, our Synthesis architecture for software defined application services provides F5 with the opportunities to play a very strategic role as customers continue to strive for competitive advantage and maximum agility by moving to new technology architectures.

Q1 was a good start to fiscal 2014 and I feel very optimistic about our business prospects for the remainder of the year.

In conclusion, I would like to thank the entire F5 team, our partners and customers for the support last quarter, and we'll now hand the call over for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Brian Marshall of ISI Group.

Brian Marshall - ISI Group Inc., Research Division

A question with respect to sort of ranking the new incremental opportunities for calendar '14, could you rank order them between the security, the refreshed hardware, as well as the new initiatives like mobile and LTE?

John McAdam

Yes. A lot of these are interconnected, Brian, a lot of them. But if I was going to say anything, I'd say security across the board. Interestingly enough, security in the service provider space is a massive opportunity in our opinion. As I said in previous calls and we've talked about is that, frankly, our roadmap has been driven a lot by some large service provider into -- in the U.S.A., in particular. So I think security is probably the top. Traffix, we're very happy about it. We're pretty excited about Versafe. I mean, it's early, early days, we haven't announced it to the salesforce yet, that will be happening at RSU -- RSA. But that could be -- the interest level, we know, is already high. We just want to get ourselves right. ACE is going to continue to be an opportunity throughout the year. And, obviously, the product refresh is at the base of that. The other sort of wild card is the pricing that we talked about. And of course, Synthesis architecture is more about making sure that we're incredibly relevant as these trends move pretty fast, whether it's to the cloud or software-defined solutions.

Operator

Our next question comes from Subu Subrahmanyan of The Juda Group.

Natarajan Subrahmanyan - The Juda Group, Research Division

John, could you talk specifically about the carrier firewall opportunities? You've mentioned that a few times as being very good opportunities in terms of success in, specifically, firewall applications. And also, could you talk about virtual as a percentage of revenue, how that did for this quarter?

John McAdam

Yes. So I'm going to turn it over to Manny and he'll talk more about the security in the service provider space. But I know enough about it, just to give an overview. I mean, the service providers are -- obviously, security is changing dramatically. A lot of it is application-type threat. But, specifically, in the service provider space, we're talking about trying to reduce cost in an environment where the volume is increasing dramatically, obviously driven by mobile. And that's where we really excel with our new solutions. So the core product is there and what we've been building and helping with the input of customers is a lot of feature set into the BIG-IQ orchestration engine so that we can scale in those environments. And we feel very, very good about it. Trials are underway and we think it is a big opportunity. Manny?

Manuel F. Rivelo

Yes. I think, just to add -- just a quick data point on that, we'll be, specifically, building on the Gi firewall, which is basically a firewall that sits in the packet core where the radio network turns over to Ethernet. And what the service providers need for mobile carrier growth is devices of high performance. And high performance not only in high throughput, which we achieved, but high connection counts. And the high connection counts are a function of all the mobile users. And then what they're looking for is, basically, firewall functionality, DDoS protection, application protection. So those are the types of features that we were putting in there. So it's feature richness at very, very high performance and very high connection counts. And our platforms are well-suited to accomplish that.

John McAdam

And as far as the VE question is concerned, we don't separate out the numbers. However, it did grow faster than our core system business and we expect it to keep doing that. Still relatively small numbers. As far as we're concerned with Synthesis, we see software and systems together, we can manage them together, we can cluster them together. They're just part of the overall solution that we've got. But yet, it did grew and we expect it to keep growing. And I think as customers move more towards the cloud, I think that's the trend and we'll make that happen.

Operator

Our next question comes from Ehud Gelblum of Citigroup.

Ehud A. Gelblum - Citigroup Inc, Research Division

So a couple questions. First of all, I know you are no longer diving deep into the different verticals you have. But I just want to get a sense, following up on the virtual question, if we could get a sense as to how Internet guys in cloud, kind of how that faired and whether that percent of your revenue is going up. And I may have missed the answer to the virtual question, if you have sort of a percentage that will be helpful, but I'm looking more for kind of how is the revenue trending customer-wise into that customer set. And then, John, you've mentioned that Diameter was still small, but it sounds like you're very excited and the order growth is there. I'm wondering, as we look out and model it by the end of this fiscal year -- or the end of this calendar year, let's say, could it get -- could Diameter get to be 5% of your product revenue? Is it something that could be that large? Or is it still going to be small, is it much more of a 2015 revenue contributor?

John McAdam

Right, right. So regarding the verticals, I mean, the technology vertical has been fairly stable. I mean, it tends to -- it's a bit related to the service provider base so it's lumpy in nature, but it's still a sizable amount. The one thing I will say about the verticals, just to be clear, when we talk about -- obviously, we give out numbers on revenue on verticals, on an actual enterprise business, which includes the technical vertical, it was actually pretty solid from a sales perspective, so we feel pretty good about that, especially North America. So no concerns there, no certain major trends. The cloud is -- obviously, that is increasing and will continue to increase and we're putting more focus in terms of doing that. We've announced some -- we actually did some press releases with some cloud partners recently. But we're in most of the big ones that you might expect. And the other question was?

Ehud A. Gelblum - Citigroup Inc, Research Division

On Diameter growth.

John McAdam

On Diameter growth, yes, yes. So, absolutely, I mean, the actual revenue in Q1 was -- modest is the word I used and that means it is pretty small. However, the number of orders was actually quite significant in terms of our win rate, I mean, we actually had replacements, as well and some Tier 1 scenarios. So I'm not going to say what we think it can be, but we definitely, assuming that we produce the goods, we're meeting the milestone, because some of these orders are multimillion dollar orders, then we would expect it to be definitely material as we get to the second half.

Ehud A. Gelblum - Citigroup Inc, Research Division

John, back on the virtual question. Can you give a percent of that you've sold in the virtual, is there any way we can look at that?

John McAdam

No, we -- Ehud, we don't break that out at this time.

Ehud A. Gelblum - Citigroup Inc, Research Division

Could we say it was up?

John McAdam

Oh, Karl has something here.

Karl D. Triebes

This is Karl. I was just going to mention, we've put a lot of effort on our virtual side in this last release in terms of significantly increasing the performance of the virtual additions. And we're not stopping there, we have plans to take them up another notch as we go forward. We've had different footprint options in terms of size, so you can buy very small 25 megabit -- or megabyte instance that you can use for certain circumstances in the cloud. Or you can go with much larger footprint options. We have new licensing models with utility billing. We're leveraging BIG-IQ, actually has a licensed server, so you can do pooling. So there's a lot of effort, there's a lot more than that. So when we talk about being able to operate in the cloud, it's a very vertical effort in terms of our technology, it's not just about doing kind of piece things to -- in your modules or other components.

Operator

Our next question comes from Alex Kurtz of Stern Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

So, John, just as a follow-up on the web scale question that was just asked, I think there's been some concern, historically, that those customers are -- they're sort of changing their architecture and moving away from branded vendors. Do you feel like you maybe have troughed that event in your pipeline, looking back the last 12 months and going forward, that's sort of out of your expectations and don't really have a lot of growth expectations in those big Internet data center, hyper scale kind of customers?

John McAdam

No. I'd say -- I mean, the reality is we're talking about 2 customers. And one wasn't a customer, 2 organizations that have done some specifics in a very specific environment, with a very, very significant workforce are able to do it. We haven't seen any more. And so we still see big opportunities in that market. Across-the-board, security, for example, is a big, big opportunity in all-in-ones. So that's a key, key vertical for us that I don't believe has troughed at all.

Operator

Our next question comes from Jess Lubert of Wells Fargo Securities.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Two questions. First for John, I wanted to dig in to the service provider business. Specifically, I was hoping you could talk about how some of these large carrier transactions may flow through the model through the course of the year. And perhaps, you can help us understand how you're thinking about March quarter seasonality here, that this has often been weak in the March period and sometimes lump down following big quarters. So I was just hoping you can help us understand if the expected timing of big deals is giving you a little bit more confidence that we may not see the level of March quarter seasonality and the carrier vertical like we saw last year? And then for Andy, question is on the gross margin, which dipped about 50 basis points sequentially. I just wanted to confirm that the product gross margin remained unchanged and to better understand how much of the incremental investment and consulting services had already taken place and how much was still to come.

John McAdam

Yes. On the service provider space in last quarter, last year. So first of all, in the service provider space, in terms of some of the linearity, as I said, we do expect it to be immaterial from the Traffix sales in the second half. We will see improvement, as well, we're pretty confident of that, in this current quarter as well. It's interesting, I mean, you can imagine that we spent a lot of time looking at our business given the results of last -- of the March quarter last year and not just in service provider, but across the board. To be fair, we haven't really seen seasonality as such in the service provider space in the March quarter. And by that, I mean it was horrible last year and it was awesome the year before. In fact, if you remember, it was a 27% quarter, the March quarter, the year before, so that the comparison was pretty tough. We still believe it's going to be more about projects and our forecast. And we feel fairly solid about what we've done in terms of getting the salesforce over that. So I don't think we're going to see the same issue.

Andy Reinland

Yes. And then on gross margin. Yes, I did say that product margin was down just a little bit, I think 6 basis points, really nothing to that. We didn't see any change in the competitive landscape or change in discounting at all. And I also said in my comments that we think that for the next quarter, it's going to stay at this level. And on the services side, we had a great hiring quarter in Q1 and pretty weighted on the services side, the upper 30%. We're usually, we're a little below 30%. A lot of that was consulting. And now -- so that pulled that margin down and now it's trying to put that consulting to work. I also said, I think, in this quarter, we're going to be pretty much the same level on the services margin and we're going to try to manage at this level throughout the year.

Operator

Our next question comes from Amitabh Passi of UBS.

Amitabh Passi - UBS Investment Bank, Research Division

Andy, I just wanted to confirm the percentages you gave us for service provider, government and enterprise. If I did the math correctly, it seems like service provider was up quite dramatically, sequentially. So just trying to understand, were there any big deals that came through? And it doesn't seem like you saw the normal sequential decline in the worldwide government sector. So again, I just wanted to confirm if we have the numbers and the directions right and maybe if you could explain some of the dynamics.

John McAdam

Yes, this is John, actually, let me address it and if Andy wants to jump anytime. But, yes, we saw a whole bunch of large service provider deals in the quarter. Most of them in our core business, most of the revenue, that's why I mentioned about the modest -- in the Traffix area. A lot of it related to 4G, LTE. Interestingly enough, most of the success was actually outside the Americas. Americas had a decent quarter, but some of the increases came in Asia Pacific, Japan and EMEA. We had very strong sales there. Remember, the other comment I made about, generally, from a sales perspective, our enterprise business was pretty strong as well. If -- when you look at the backlog mix that happened, that was a little bit slanted towards the service provider. But also, typically, and we see this quite often, is that when we have a very strong Federal quarter at the end of September, where you get orders right in at the end of September. Some of that federal business will enter backlog and shipped out as well, that was -- probably took up a little bit more than it normally would.

Amitabh Passi - UBS Investment Bank, Research Division

And, John, just as a follow-up on the security side, particularly in the carrier space pertaining to the Gi firewall, who are you running into most often? And who do you think you're taking share from?

John McAdam

Juniper is there, so they've got a very large install base. We think that's, specifically in service provider, is a big opportunity for us.

Operator

Our next question comes from Brian White of Cantor Fitzgerald.

Brian John White - Cantor Fitzgerald & Co., Research Division

John, it looks like Diameter signaling business is at some type of inflection point. I know you said the revenue was modest, but it seems like we're looking at a attractive trajectory going forward. Now I'm just wondering, how do we think about where you're seeing activity in terms of geographically? And also, are deal sizes bigger or smaller than the traditional BIG-IP business?

John McAdam

Yes. I mean, first of all, yes, the deal sizes tend to be projects and, hence, the revenue versus the sales order discussion, they tend to have milestones associated with them and they tend to be bigger, actually fairly significantly bigger, naturally. We think this is the best technology out there, that's key. And we really believe we have the best technology. We need to watch this because there's some big companies out there with some good R&D and we're making sure that we stay ahead in technology. I do think it's come to a bit of an inflation point, actually, from a sales wins perspective. I think it's really done that. It's now all about cementing those wins and increasing more business.

Brian John White - Cantor Fitzgerald & Co., Research Division

And is there any particular geography that stands out where you're seeing more activity?

Manuel F. Rivelo

So, Brian, this is Manny, let me just add. So we're seeing it in all geographies. Obviously, all providers are moving toward LTE, 4G networks. And in the next 2 years, we're projecting to see almost all of them go to that. So we're seeing it across the board. We're seeing it in Europe, we're seeing it in Asia and we're definitely seeing it in the Americas, which probably led this -- the 4G movement was led by the Americas. But to John's point on the technology leadership, our portfolio solves problems that most of the portfolios in the industry don't solve. We provide both DRA, DEA, in a working functionality and support over 30 of the Diameter signaling protocols that are out there, which allows us to really inter-operate with just about any service provider, with just about any component that's out there. So that's just giving us a huge competitive advantage. And then part of the challenge, as you very well know, this is going into a very strategic part of their network. Consequently, proof of concepts take a period of time to make sure if they're working inside those environments. And then, over time, is the acceptance by tier, which leads to consulting work that we need to continue to do so. We're pretty excited about the win so far and we continue to see incremental orders from those that we won, as well as new business. So hopefully, 20- -- the rest of this year will pay out and 2015 we will even be more successful.

Operator

Our next question comes from Rohit Chopra of Wedbush.

Rohit N. Chopra - Wedbush Securities Inc., Research Division

Just wanted to ask John, has there been any revenue through the Cisco partnership yet or any engagements that you can talk about? That's the first question. The second one is for Andy. As far as -- and I know you have to wait for the announcement at RSA, but as far as the building out of the operation centers for the new subscription security product, does that have any impact on the model from an expense standpoint near term? And then when do you think the revenue impact actually hits the model?

John McAdam

Yes, on the Cisco partnership, we've been focusing on technologies and links and roadmap with them, as we have been doing with VMware, as well. There have been engagements, tactical engagements, in geographies. We've seen that in the past, I actually said that in the last call, so I wouldn't really call that out yet.

Andy Reinland

Yes. And on the stocks that we have in Tel Aviv in Seattle, yes, there's an up-front investment there. Some of it, in particular in Seattle, is CapEx. So it will be recognized over time. And the staffing, with Versafe coming in, we had a level of staffing there. So we're going to be adding to that and getting them trained up in anticipation of orders. The thing to point out here for revenue is this is going to be a subscription model. So really what you're going to see over time is that buildup of subscription on the balance sheet that then we'll recognize over time. So I think it will be a slow take-up. But the main message is, yes, it's an upfront investment, but not -- one we think that we can manage in our current gross margin structure.

Operator

Our next question comes from Kent Schofield of Goldman Sachs.

Justin Jordan - Goldman Sachs Group Inc., Research Division

It's Justin Jordan filling in for Kent. Two questions. How should we think about hiring, going forward, given you hired a little bit more than expected in this past quarter? And also, are there any new Cisco displacements to announce? Or where -- are you going to -- how much traction are you seeing in the market with that?

Andy Reinland

Yes. So on the hiring front, I mean, we said on our last call that we plan to be pretty aggressive on hiring. And we did. We had a great quarter this quarter, at 165. For the second quarter, we're going to bring those people in, get them on-boarded. That number will pull back a little bit. We said we're going to be over 100 this time. But I wouldn't read anything into that, it's just bringing people on, managing the expenses as we go forward. But I think you're going to see us continue to be pretty aggressive with particular focus on sales. It's just we're going to have -- want to crank up the salesforce as we see these opportunities developing.

John McAdam

Yes. On the ACE opportunity, no, it still remains to be very strong. We saw some more Fortune 500 wins, brand new, which is clearly good, because we tend to sell a lot into those accounts. We also saw -- typically, North America had been leading the parade, but we're starting to see that happening in Europe and in Asia as well. So, as I said earlier, actually, I think it's probably a 2-year, at least, opportunity.

Operator

Our next question comes from Simon Leopold of Raymond James.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

I wanted to see if maybe you could provide a little bit of perspective from a macro, following on IBM's commentary last night, that bellwether was somewhat uninspiring and Cisco's guidance last month, somewhat uninspiring. You're selling it into similar markets in terms of data centers and tech. Maybe just if you could step back and sort of help folks understand how you're different than what the bellwethers are indicating.

John McAdam

Yes. I mean, there's a couple of things and, obviously, I can't talk for these companies here. I don't know as much details, probably, as you do. However, I know that they have entered the emerging markets. We haven't seen that, we have said that, in the past, that China is a top market, it actually continues to be that in this kind of quarter. But overall, we're actually happy about the emerging markets. And a lot of that is driven by security and mobility, in mobility, specifically, in emerging markets. So I don't think we've got the same issues. I think the other thing is that we embraced the whole concept with our Synthesis architecture and before that, with the way the R&D was to enter the whole software portfolio that we have. I think that, Stanley, is very well moving forward in terms of being very relevant to the technology trends of software-defined networking of the cloud. So I'm not sure we're quite in the same example as some of the much larger companies.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay. And just one clarification. Last quarter, you talked about operating margins in the back half of the fiscal year of being in the upper 30s. Just want to revisit and see if you can confirm that's still true?

Andy Reinland

Yes, we did make that statement and we've made no change to that.

Operator

Our next question comes from Mark Sue of RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC, Research Division

John, if I look back a year ago, things were pretty tough, the company was growing in the mid- to low-single digits. I think you classified as a year of 2 halves. Now we're seeing this re-acceleration. And the simple extrapolation is that F5 has new products, so you're seeing some catch-up of delayed purchases since you now have a refresh. Or do you feel it's more expansive than that? Perhaps the ADC market is becoming more important, virtualization is accelerating. So maybe how that all ties into some qualitative thoughts of larger deals, architectural projects and how that's shaping for the whole year, so that it's -- this is not just a transitory new product refresh?

John McAdam

Okay. I'll leave Manny to talk about the ADC market and what he sees there and other parts of the question. But I do think -- we've always alluded to this a lot, given a year ago. We've done the product transition. We couldn't really put a number out there in terms of what the issues were from a delayed perspective, but it's pretty certain it was -- it's a significant number, that's over. Traffix has, obviously, started to build some momentum. Our security portfolio solution has increased dramatically. I think that's something to remember. And also our name in security has increased dramatically and our channel's ability to execute. So there's some really key issues that, I think, are very, very different from last year. And Manny?

Manuel F. Rivelo

Yes. And what I would add, Mark, to it is, is that the ADC market has grown a lot, changed a lot over the last 5 years. Where I think if you go back about 5 years ago, it was predominantly a traffic management market. And over the last 5 years, it's consumed a lot of new services. Services to not only make applications available, but also make them secure and make them faster. You will give them more performance characteristics. As a result of that, the relevance of that ADC market has grown, whether it be on-prem or in the cloud or a hybrid environment. And that's really what we're seeing. And our strategy that we've been implementing with Synthesis is actually to do that, to create a set of services that sits on top of any network fabric that are highly elastic that can enhance that user-application experience, making it fast, secure and available, no matter where the user may reside, on-prem and/or at home or on the road. And that's really been what we've been focusing on and we're seeing that pay off in the market. Not only in the traditional enterprise markets, but also in the service provider market, because a lot of what you're seeing happening in the service provider market is monetization strategies where you're trying to move more applications to those mobile devices. So I think the ADC, its importance is growing, and rapidly, in all the new architectures that are out there.

Mark Sue - RBC Capital Markets, LLC, Research Division

So a lot of it does point to your sustainable trends, I guess, from John and your comments, Manny?

Manuel F. Rivelo

Yes. I believe that there's going to being large sustainable trends and you'll see market shifts occurring over the next decade.

Operator

And our last question will come from Tim Long of BMO Capital Markets.

Timothy Long - BMO Capital Markets U.S.

Andy, one for you and one for John. Andy, a little bit more aggressive cash usage in the quarter on the buyback, pretty good price that you got out of that, relative to where it's at now. So was there -- and with the incremental allocation here, any change in philosophy on buybacks? Should we expect more healthy levels like we just saw this last quarter on the buyback going forward? And then, John, just curious on the product refresh impacts, I think you mentioned the ACE replacement and Traffix and security has really long-term trends, how long do you think the product refresh, from the last 12 or 18 months, can help results? And when do you think we'll need to maybe touch up some of those products in the portfolio?

Andy Reinland

Yes. So on the buyback, yes, you're right, we -- definitely was a much stronger buyback, given the share price. As the board set price targets, it triggered to the quarter and I think took advantage of a good opportunity for us to act on that. And then we're going to continue to execute with the board, based on the 10b5-1 plan that puts price targets in place. I think the increase of $500 million sends a message. We'll see how that executes out. But they approved it and so we're going to take that direction and send our 10b5-1 and go accordingly.

John McAdam

And then regarding the product refresh, if you look historically, there certainly have been 2 to 3 years of growth that we would assign directly to that, no reason to think that's different. The other thing just well among the subject, but I also -- we feel -- it's still early days, a little bit cautious saying this, but it was -- the good-better-best pricing, I think, is going to go hand-in-hand with that, obviously, from a software module perspective. The other thing, the lesson we've learned big time, is that when we do the refresh the next time, it will not be as elongated now. It won't take over such a long time as we've done before. And probably, we'll be more -- going to be more aggressive about the timing between the refresh. And Karl might want to comment on that.

Karl D. Triebes

Yes. I mean, I talked about this at the Analyst Day. But we are going to be definitely -- we've already actually started our design cycle in terms of looking at the roadmap and where we're going to be refreshing the appliances. But having said that, we're also introducing, every release, new hardware and new variance of our platforms. And we just released the 2250 blade, the new high-end VIPRION blade that runs over almost 4X the performance in layer 7. It's got a bunch of other features with multi-tenancy and other things. And we have new hardware that will be coming out in each release as we go forward, including some upcoming ones later this year. So we're continually adding to our high-end, we're continually adding to the platforms, but we will be starting, in terms of when we start refreshing things, we'll be refreshing them at different cadence. And part of our cadence is aligning with some of our component vendors to make sure that we're right at the cutting-edge of when they're releasing their next-generation components, so that we're aligned with that. And we were -- as part of the last release was that alignment and we think we're in that cadence now that we can drive towards. So...

John Eldridge

Okay. Thank you very much for joining us. And again, if you have any follow-up questions, please don't hesitate to give me a call. Thank you. Talk to you next quarter.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: F5 Networks Management Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts