Foundry Networks Q2 2007 Earnings Call Transcript

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Foundry Networks (FDRY)
Q2 2007 Earnings Call
July 26, 2007 5:00 pm ET

Executives

Mike Iburg - Treasurer
Bobby Johnson - President & CEO
Dan Fairfax - CFO

Analysts

Ken Muth - Robert W. Baird
Tim Long - Banc of America
Matt Robison - Ferris, Baker Watts
Andy Schopick - Nutmeg Securities
Mark Sue - RBC Capital Markets
Erik Suppiger - Signal Hill
Manny Recarey - Kaufman Brothers
Troy Jensen - Piper Jaffray
Rich Church - C.E. Unterberg, Towbin
Subu Subrahmanyan - Sanders Morris Harris

Presentation

Operator

Welcome to today's teleconference. (Operator Instructions) Please note that this call may be recorded. I will now turn the call over to Mr. Mike Iburg of Foundry Networks. Please go ahead.

Mike Iburg

Thank you. Thank you and good afternoon, everyone. Thank you for joining us today for Foundry Networks second quarter 2007 financial results conference call. I am joined today by Bobby Johnson, President and Chief Executive Officer; and Dan Fairfax, Chief Financial Officer of Foundry Networks.

Earlier this afternoon, the Company issued a release reporting the second quarter financial results. This release can be accessed from our Investor Relations section at Foundry's website at www.foundrynet.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 up for seven days. The dial-in access number for this replay is, 402-220-4933. This call is also being webcast live with a web replay available. These may both be accessed from the Investor Relations section of Foundry's website.

Before I begin, I would like to make a brief statement regarding forward-looking remarks. Today's call 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, 2006.

As well as the Safe Harbor statements in the press releases 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 statements contained in today's call. I would now like to turn the call over to Bobby Johnson, President and CEO of Foundry Networks. Bobby?

Bobby Johnson

Thank you, Mike. And good afternoon, everyone. I am pleased to announce that Foundry continued its revenue momentum for the fourth consecutive quarter during the second quarter of 2007. As a result of this continued momentum, we set both a quarterly revenue record and a half-yearly revenue record while increasing our gross margins. As a part of the revenue records we have set a new all-time quarterly enterprise record. Additionally, we set a new service provider quarterly record post the tech bubble.

During the quarter, we posted record quarterly revenue of $143.2 million, an increase of 32% over last year's second quarter and a 5% sequential increase over this year's Q1. This was our fourth consecutive quarterly record and a new half-yearly record of $279.1 million. In addition to these records, I would like to highlight several other key financial successes for the quarter.

These key successes include, number 1, our bookings remain strong leaving us with a continued book-to-bill ratio greater than 1. Our GAAP gross margins improved to 60.2%. Overall, we continued the -- number three, overall we continued to experience strong performance from our major geographies including our North American commercial business which achieved a new revenue record while representing 62% of revenues.

Number four, our EMEA operations achieved a new revenue record led by the UK setting an all-time high. Our EMEA results represented 15% of total revenue. And number five we generated $24 million in cash for the quarter and ended with a strong cash position of $921 million. This left us with an annualized revenues per employee of approximately $655,000. One of the highest annual revenues per employee performances in the networking industry.

Overall, we saw strength in all of our major new product lines. We saw strength in our wireless, our Layer 4-7 traffic management products, our Layer 2 and Layer 3 switching products and our routing products. As previously mentioned we have set new records for both the enterprise and service provider. For both markets we have seen diversity in our account base and geographic contributions. For the enterprise we have seen new contributions from several key FORTUNE 500 accounts as well as a successful diversification away from our Federal account base.

For the service provider market we've had success in many differing applications and markets including metro and regional backbones, national backbones, content delivery, and data center applications. We have approximately 275 customers deploying our Internet and Metro router platforms for these plus other applications. Out of the 275 customers, there are approximately 30 customers utilizing our products for MPLS backbone and access applications.

Additionally, we have approximately 90 customers utilizing our platforms for VPLS applications for Metro as well as backbone access. And we have more than 80 customers using our platforms for traditional V4, V6 routing for metro access and backbone applications.

We have several tier 1-carrier customers that have purchased and deployed our router platforms in the above applications. We continue to win new deployments in these customers and we have more tier 1 prospects actively trialing our products.

As we continue on our mission of being the value added switching and performance leader, there is one key product announcement from last quarter that I would like to highlight. And that is the announcement of the 32 Slot router -- the 32 Slot routers. They debuted at MPLS-I Las Vegas and they are the highest performing single chassis routing platforms in the industry. They are significant interest in them and we have already received purchase orders for them. They should ship for revenue later in this, the third quarter.

Given our recent momentum and our growing cash position, Foundry's Board of Directors has made a decision to acquire up to $200 million worth of our shares. Even with this cash usage for stock buyback, Foundry will remain in a very strong financial position and we will continue to consider other usages of our cash including acquiring other companies or technologies that may help us increase our strategic product and customer footprint to increase our growth rate. For details on the buyback and a detailed review of our Q2 financials, I will now turn the call over to Dan Fairfax, our Chief Financial Officer. Dan?

Dan Fairfax

Thank you, Bobby. And good afternoon, everyone. I will take the next few minutes to present our financial results for the second fiscal quarter ended June 30, 2007. Foundry posted record quarterly revenue for the second quarter of 2007 of $143.2 million, as compared to $108.4 million in the second quarter of 2006 and $135.8 million in the first quarter of 2007. This represents an increase in revenue of 5% sequentially and an increase of 32% over the prior year. Our revenue growth can be attributed to the investments we are making in expanding our sales force and the depth of our product portfolio.

There is particular strength in two key geographic areas. Our North American commercial revenue increased 49% year-over-year and represented 62% of total revenue. And sales to Europe, the Middle East, and Africa, our EMEA region, reached record levels representing 15% of total revenue in the period growing 21% year over year. Within EMEA, sales in the United Kingdom were particularly strong growing over 50% year over year to a record high level.

GAAP net income for Q2 was 16.4 million or $0.11 per diluted share compared to net income of 4.4 million or $0.03 per diluted share in the second quarter of 2006 and net income of 9.1 million or $0.06 per diluted share in the first quarter of 2007. Included in Foundry's results for the second quarter of 2007 was $9 million of non-cash stock-based compensation expense.

Also included are $3 million in expenses related to the recently completed accounting restatement. Excluding these expenses and the related tax effect, non-GAAP net income in the second quarter of 2007 was 23.9 million or $0.16 per diluted share.

I'd like to direct you to our press release for a reconciliation of GAAP to non-GAAP net income. In addition to the earnings release issued today, the Company announced that its Board of Directors has authorized the Company to repurchase up to $200 million of Foundry shares. I will discuss this further in a minute after I complete the full financial review.

Let me provide you now with additional details on the breakdown of our revenues. I have mentioned the regional strength we saw in North America and EMEA. In Japan, however, our sales represented 6% of total revenue. A slight decrease in the Japanese sales was due to the seasonally weak enterprise environment we saw. We saw a weakness in Japan so much of that being reported by other networking companies. Like our contemporaries, we would expect to see the Japanese market rebound over the next several quarters.

Our federal bookings were in line with our Q2 expectations. However, our sales from the U.S. Federal Government recognized in the second quarter represented 11.4% of total revenue, which was below our expectations. We attribute this to the timing of congress approval of the war supplemental which caused unusual nonlinearity in our receipt of federal orders in the quarter. This is in strong contrast to our commercial business where we saw improved linearity in the quarter. For our overall business, 40% of our Q2 bookings were received in the month of June.

Our overall domestic revenue was 73.4% of our total business and international sales represented 26.6% of total revenue. This was essentially unchanged from 73% for domestic and 27% for international sales in the first quarter. Our enterprise business continues to be our primary source of revenue.

Enterprise customers accounted for approximately 77% of our total revenue during the second quarter with service providers growing to 23% of total revenue compared to 21% in the first quarter. Although at first glance this may not seem significant, our service provider revenue was up over 15% sequentially and up over 50% when compared to the same quarter last year.

Revenue from our chassis based products represented 71.3% of revenue in the second quarter of 2007. Revenue for the first six months in 2007 then was $279.1 million compared to $222.4 million for the first six months of 2006. And net income for the first six months of 2007 on a GAAP basis was $25.5 million or $0.17 per diluted share compared to GAAP net income of $10.8 million or $0.07 per diluted share for the same period in 2006.

Before I begin discussing our gross margins and operating expense, I would like to point out that the figures I discuss next are all non-GAAP numbers. We have excluded charges for stock-based compensation and the restatement-related costs we incurred as well as litigation settlement costs in order to make our results more comparable to prior periods and to those reported by other companies. The detailed GAAP to non-GAAP reconciliation can be found in the press release we issued earlier today.

Our gross margins increased to 60.6% in the second quarter, representing a 120 basis point improvement from the first quarter when gross margin was 59.4%. As we have mentioned previously, our Q1 gross margins have been impacted by investments we made in our service infrastructure and to a lesser extent our product versus service revenue mix.

Our gross margins are now back in our target range of 60 to 65%. Gross margin in Q2 benefited primarily from a favorable shift in mix of our product sales, and a 9% sequential growth in our service revenue, with service -- service cost of sales having little or no increase. Product gross margins were 57.5% for the second quarter, representing an 140 basis point increase from the first-quarter level of 56.1%. And service gross margins were 77.6% for the second quarter, representing a 90 basis point increase from the first-quarter level of 76.7%.

Details of our operating expenses are as follows--Foundry's research and development costs were $14.4 million, or 10% of revenue in the second quarter compared to $14.6 million or 11% of revenue in the first quarter of 2007. Essentially flat sequentially. Sales and marketing expenses were $34.6 million, or 24% of revenue in the second quarter, compared to $33.3 million or 24% of revenue in the first quarter of 2007. The increase in absolute dollars was due to increased head count, sales commissions, and the cost of trade shows.

In Q2 of each year we see seasonally increased trade show expense due to MPLS-I Las Vegas, and Tokyo and NextCom, Chicago. General administrative expenses were 10.0 million or 10 million for -- or 7% of revenue for the second quarter compared to 8.4 million or 6% of revenue in the first quarter of 2007.

The increase was primarily due to accounting services associated with the 2006 year-end audit which was not completed until the second quarter as a result of the restatement. Excluding the restatement costs, which are captured in other charges, net line on our income statement, operating margins were 19.5%, just shy of our target range of 20 to 25%. But a meaningful improvement from last quarter's 17.8%. Our tax rate for the quarter was 38.5%.

Now let me turn to the balance sheet for a few comments. The Company's cash and marketable securities balance grew by $24 million in the second quarter of 2007. The total value of cash and marketable securities now stands at $921 million. In Q2 we did make a prepayment of our 2007 income taxes of $18 million. Day sales outstanding and accounts receivable were 56 days in Q2, down from 59 days in the first quarter.

This was due to improved booking linearity, which I mentioned earlier. Our net inventories increased by approximately $5 million in Q2, an increase we felt allowed us to better meet the order demand from our customers for our broader range of products. Our inventory turns, however, were essentially flat sequentially.

Once again, in Q2 our book to bill was once again greater than one. We ended the quarter with a total head count of 873 employees compared to 843 in the first quarter of 2007. This was an increase of 30 people. The increased personnel in Q2 were roughly split equally between our sales and engineering departments.

I'd like now to take a moment to discuss the $200 million share repurchase program our Board of Directors approved earlier this week. As you are aware, the Company has been considering its use of cash for some time and with the completion of the accounting restatement, the Board felt that this was an appropriate time to initiate a share repurchase plan. The Board and management have fully considered a range of options at Foundry's future liquidity requirements in determining the size of the share repurchase announced today.

We will continue to reassess our liquidity needs in the future, particularly in light of our focus on potentially acquiring technology, products, or companies. In addition, our Board believes that the Company has a bright future ahead and at current market prices sees the Company's stock as a good value. At the Board's direction, the Company may purchase shares from time to time depending on market conditions, trading windows and other factors.

All in accordance with Securities and Exchange Commission requirements. The Board authorization commences immediately. The Company has a desire to be opportunistic by taking advantage of our stock's natural volatility to reduce our weighted average purchase price. However, at the same time, the Company has a desire to get this done and we will be balancing these two factors in making purchasing desists. We will be reporting to you our progress on a quarterly basis.

Also it's important and we wanted to mention to you that the trading window for Foundry's Directors, Officers and other insiders will open next week for the first time since May of 2006. And while we cannot predict the number of shares our Officers, Directors, or other inside persons may trade, we did want to make note of the possibility of some interest in liquidity from these parties.

Because I have been unable to sell any shares during the time of the investigation and completion of the restatement process. Consistent with our practice we will not be providing formal revenue or EPS guidance. We would, however, like to provide a qualitative view of the current quarter.

Looking at the future, we believe our North American and European commercial businesses will continue to show growth in the second half of 2007. But we are cognizant of the soft seasonality of the third quarter and therefore are slightly tempered in our expectations for these specific geographies in the current quarter.

We expect our Federal business, however, should experience robust seasonal strength in Q3 and should be similar to the trend we experienced in the third quarter of 2006 and expect that the third quarter federal revenue will also be buoyed by shipments of the incremental backlog we billed from orders received late in the second quarter. The rebound in Federal may be significant enough to offset any seasonal weakness in North America or Europe.

And, finally, as I wrap up, just a couple comments on the service provider opportunity. We have seen steady progress within this vertical through the first six months in 2007. We expect this progress to continue. Service provider revenue now represents approximately 23% of total revenue up over 50% from the same quarter last year. And we expect this revenue stream to continue to grow faster than our overall enterprise business. With those comments, I will now turn the call back over to Bobby.

Bobby Johnson

Thank you, Dan. Our strategy and execution on our major goals continues this year much the same as last year. Specifically, throughout this year we have three key objectives. Number one, we will continually endeavor to introduce leading-edge products in both price performance and feature sets into our targeted and adjacent markets.

Number two, we will continually endeavor to create an ever bigger Foundry brand in the press and in our customer's minds and networks. And number three, we will continually endeavor to increase our sales force and sales presence in both established and new territories for Foundry.

We believe that the investments we have made and continue to make in the business will drive improved performance for the second half of this year and establish a stronger foundation for the longer term. The last four quarters have been very positive for us. Our present -- our performance reflects the success in our investments and growing our worldwide presence, through our branding and expanded sales organization. And the timing and execution of our product launches.

Our strategy of diversifying within our U.S. Federal business to branch into new agencies is continuing to be successful and gives us optimism in a robust second half for this vertical. Additionally we continue to focus new efforts on our expanding service provider business and we believe we will continue to gain traction in key strategic accounts. In closing, I would like to thank all of our employees, partners, customers and shareholders for their commitment to Foundry. At this point, I'd like to turn it back to the operator, for a question and answer period.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from the site of Ken Muth. Please go ahead.

Ken Muth - Robert W. Baird

Hi. On the Federal Government vertical, it just seemed a little unusual that it was off that much and obviously on the flip side of that your enterprise business was highly uncorrelated too from seasonal patterns. Anything you can shed a light on the government vertical specifically and what gives you confidence that it will be back this quarter?

Mike Iburg

Well, I think -- Ken, it's Mike. So I think if you go back and listen to some of the comments that Dan made in his script, actual order bookings from the U.S. Federal Government were in line with our expectations. We just weren't able to ship at all. And some of that was because -- the majority was because of the linearity in which of the orders came in. So as Dan mentioned, the -- the Iraq supplemental which we discussed on the last conference call was not signed until the very end of May.

As a result, a number of orders were pushed into the very, very end of June. So we weren't able to -- to get out the orders that we received from the U.S. Federal Government. So we have a fairly high confidence level if that comes back because we've got that piece in our -- effectively in our backlog. And we believe we're coming into a seasonally strong federal quarter.

Ken Muth - Robert W. Baird

Yes.

Dan Fairfax

That plus the diversification across the -- the federal vertical that we talked about last quarter.

Bobby Johnson

This is Bobby. Calendar Q3 is usually a seasonally good federal quarter.

Ken Muth - Robert W. Baird

Right.

Bobby Johnson

Therefore, given all of the statements from Dan and Mike, therein lies some of our optimism.

Ken Muth - Robert W. Baird

And then just a follow-up on the margins which are improving. Is it possible we could continue to see better margin enhancement throughout the second half of '07?

Bobby Johnson

This is Bobby. That's my continual goal. I don't know what expectation to officially set. But we continually look at that. We operate in a competitive environment and we're trying to gain market -- market share. So there's always some trade-offs we have to make.

Ken Muth - Robert W. Baird

Thank you.

Mike Iburg

Thanks, Ken. Next question?

Operator

Next question comes from the site of Tim Long from Banc of America. Please go ahead.

Tim Long - Banc of America

Thank you. A few quick ones if I could. Talking about the routing business you mentioned more tier 1 wins. Just update us on the first MLX and XMR revenues in the quarter and how should we look at the traction with the tier 1s? Is it really hitting the revenue line now, or are these just initial wins that we have yet to see? And then the comments about gaining steam with some of the FORTUNE 500s. Could you try to put that in scale for us, too, to let us know maybe how many new customers were added there or how should we look at that? Thank you.

Mike Iburg

Well, this is Mike again. So on the router business -- and apologies for not providing that in the script. The router business was approximately 13.5% of the total revenue. Sorry, 13.5% of the product revenue. So -- scratch that. It was 13.5% of the total revenue. Layer 4-7 was about 11%. The service revenue, which you see broken out in the P&L that we provided was about 15.7% and the balance was the Layer 2-3 products. So as you'll see, the -- the router business was down slightly in the quarter, but, we're -- we view that as just digestion from earlier shipments and we're pretty optimistic about how that profiles into the back half of the year.

Bobby Johnson

Okay. This is Bobby. Let me add a little more flavor to that. Overall, our service provider revenues were up because we sell complementary products into the same service provider. So as we are selling routers for the Edge or the Core, we are also selling server load balancers as well as Layer 2 aggregation switches in different parts of the network, or in some cases in the same part to build a complete environment. So our service provider revenue was up.

The, -- the MPLS enabled router revenue was slightly down. And a little bit of that is attributed to -- we've introduced the 32-Slot router in the quarter that doesn't ship until this quarter. So there are lots of people showing interest in that platform and waiting trials of that platform and in some cases we received orders for that platform but it will not ship until this quarter.

Tim Long - Banc of America

Okay. And that's despite the adding a number of tier 1s in the quarter?

Bobby Johnson

Well, that's -- despite that, I mean, we've added tier 1s in the last several quarters. But these are initial deployments. And, as I mentioned, continued deployments will continue in -- in those tier 1s but also we're in trial in many -- and some of those tier 1s are awaiting the 32 Slotter that I just mentioned.

Tim Long - Banc of America

Okay. Great. And then onto the enterprise FORTUNE 500 question?

Bobby Johnson

Well, as Foundry gets both larger and more presence and an expanded product line, we're seeing more worldwide and global rollouts and regional rollouts among name-brand FORTUNE 500 accounts. And -- and in some of those cases -- some of those FORTUNE 500 rollouts rival some of the federal or service provider rollouts in dollar revenue.

Tim Long - Banc of America

Okay. Would you say that larger enterprise is the big driver of the North American enterprise business this quarter?

Bobby Johnson

Yes.

Tim Long - Banc of America

Okay. Thank you.

Mike Iburg

Next question.

Operator

The next question comes from the site of Matt Robison from Ferris, Baker Watts.

Matt Robison - Ferris, Baker Watts

Good afternoon. On the enterprise side, are you seeing just a cyclical improvement in demand broadly, or is there -- are there some specific drivers that you would identify? And I also -- in the past it seems like you've had kind of a nice niche where you've had a value -- value performance proposition and Cisco's recently come out with some new products between their low end and their high end that appear to offer some value for some of the data centers. I was wondering if you've seen any incremental competitive strength from that?

Bobby Johnson

Ken, this is Bobby. I'm going to try and break your questions down. The competitive environment continues, we view Cisco for the LAN switching as our primary competitor. And that's where you're asking your question. We've always viewed them as a primary competitor. And we think we still remain with leading product.

Obviously Cisco's got a big presence and a big brand. The trends -- I can't say that there was any single trend that we saw in the quarter. Obviously, we're seeing a continued interest in the combined voice and data, the Voice-over-IP for enterprise infrastructure as well as voice data and wireless, continued rollouts for large buildings, large campus environments. But that's a continuing trend. Nothing unusually new.

Matt Robison - Ferris, Baker Watts

Have you seen any incremental strength from the big Internet content providers and their large data centers?

Bobby Johnson

Absolutely. And that's one of the areas that we like to focus on because our value proposition of high-performance, energy efficiency, high port count, high feature content plays very well for content delivery and, in particular, data center generically.

Matt Robison - Ferris, Baker Watts

I missed the breakdown between Japan and APAC. Can you provide that again?

Bobby Johnson

Dan.

Dan Fairfax

I don't think we actually broke it down but we told you that Japan was 6% and you could back into the APAC piece.

Matt Robison - Ferris, Baker Watts

Okay. And it looks like your proceeds from options exercised was just under 6 million, is that right?

Dan Fairfax

Yes. Right around 6 million.

Bobby Johnson

Yes.

Matt Robison - Ferris, Baker Watts

Okay. I'll get in the queue. Thanks.

Mike Iburg

Next question, please.

Operator

Your next question comes from the site of Andy Schopick from Nutmeg Securities. Please go ahead.

Andy Schopick - Nutmeg Securities

Hi. I'd like to ask you, Bobby about some of the possible government opportunities with respect to the improvements that are going to be taking place in the overall infrastructure. We know that ATT, Verizon, and Quest have been selected by the government as competitors for a large federal telecommunications contract.

I think it's called Networks Universal and there's another one called Networks Enterprise that's going to be awarded as well by the GSA. Does Foundry have any involvement in these projects or relationships with the carriers that have more or less been selected where you could be a supplier into these network upgrades?

Bobby Johnson

Yes. Many of the -- the companies that you previously mentioned act as federal integrators and, yes, we are actively trying to participate in these as well as additional opportunities.

Andy Schopick - Nutmeg Securities

Is there a time frame in which you would expect to be either notified or would have some greater clarity as to your possible participation?

Bobby Johnson

Well, there's -- I'm not sure that I have all the liberties to discuss all of that. But we're actively participating in many of these opportunities. And there's opportunities that are decided all the time. I'm not quite sure if--?

Andy Schopick - Nutmeg Securities

Well, I ask because these are clearly multibillion dollar projects extending over a number of years. And certainly I would love to know the extent to which Foundry may be a player and participate in some of those programs.

Bobby Johnson

I'm not sure that I have absolute clarity on the global view of what you're saying. We have clarity on large aspects, but we are typically in competitive situations for many of the target areas. And certainly we like to focus on the federal opportunities.

Andy Schopick - Nutmeg Securities

Well, there are numerous federal agencies involved, including some of the largest, like Treasury and Homeland Security and I don't know that you've ever spoken specifically about some of the federal programs or agencies you're working with, but, again, trying to get some greater insight into that potential opportunity.

Bobby Johnson

I think there's a lot of opportunity. There are, in particular, some of the accounts you named are existing Foundry customers. And we are working on a lot of different opportunities, some of which I cannot disclose that are pretty substantial.

Andy Schopick - Nutmeg Securities

Well, best of luck. Thank you.

Mike Iburg

Thanks, Andy. Next question, please.

Operator

The next question comes from the site of Mark Sue from RBC Capital Markets. Please go ahead.

Mark Sue - RBC Capital Markets

Thank you. Bobby, can I get some additional comments on how linearity might shape up for the upcoming quarter? It seems it should be more front-end loaded due to the carrier trends and also the slipped fed deals, which you should have already recovered.

Bobby Johnson

I can't draw the same conclusion as you because we have a lot of different geographies and the summer quarter is usually a little sleepy, either in the beginning or the middle. And it's usually the month of September that it's the more exciting because of just the summer quarter.

So certainly we have a backlog and certainly we get orders all the time. But the timing of those are influenced by many different things. Additionally, as the new 32 Slotters will not ship until later in the quarter, that could affect our linearity for the quarter.

Mark Sue - RBC Capital Markets

Considering the backlog that you have now, will the September quarter be up sequentially? Yes, maybe, or, expletive yes?

Dan Fairfax

I think we're saying the back half will be very strong. And in terms of the qualitative guidance we gave, we're obviously very optimistic about the federal piece and guardedly looking at how is the summertime in Europe and North America going to offset that?

Mark Sue - RBC Capital Markets

And Dan philosophically on this repurchase program, is the buyback something notional or will Foundry commit to all of it right away considering where the stock price is?

Dan Fairfax

So we've talked with our banking advisers and think we have a realistic program to make the whole $200 million buy happen. As we said, we want to take advantage of some of the stock's volatility to make sure we're buying at appropriate prices and it's hard to predict exactly how we'll acquire those shares but we're committed to doing it.

Mark Sue - RBC Capital Markets

Got it. And $17 is an appropriate price?

Dan Fairfax

Well, we believe at this point -- I mean, yes, it's our belief that the stock represents a good value at this price point. The problem is that we don't know where the stock's going to go tomorrow or next week or next month or next year.

Mark Sue - RBC Capital Markets

Got it. That's helpful. Thank you, gentlemen, and good luck.

Bobby Johnson

Thank you.

Dan Fairfax

Thank you.

Operator

Our next question comes from the site of Erik Suppiger from Signal Hill.

Erik Suppiger - Signal Hill

Congratulations on a good quarter.

Bobby Johnson

Thanks, Erik.

Erik Suppiger - Signal Hill

First, Mike, you had just given a product breakout and I think the last piece you had given was 15% for one of the products. What was that related to?

Mike Iburg

That was the service component.

Erik Suppiger - Signal Hill

Okay.

Mike Iburg

So the 4-7 was 11%, the routers were 13.5%, the service -- the support element -- the service support revenue was, 15.7% and the plug or the delta was the -- or the balance was the Layer 2-3 products.

Erik Suppiger - Signal Hill

Okay. That's fine. And just want to make sure I understand. You only shipped 40% of your products in the month of June. Usually that's more -- more like 50%, is that right.

Mike Iburg

That was actually -- actually, it was a bookings number I was talking to.

Erik Suppiger - Signal Hill

So you had only gotten 40% of the bookings in the last month. And yet it sounded like the federal came in very strong in the last month. Why -- why is -- why is that the situation?

Mike Iburg

Well, I think if you -- if you -- well, our experience was a surprisingly linear enterprise business, both in North America and in Europe. And that was very good linearity in both April, May, and June. And very good consistency and good order flow. And so we saw a very solid quarter on the enterprise front. On the federal piece, that was much more back end loaded.

So as a result, the bulk of those orders came in the last month and a number of those came very, very late in June. That's why 40% of the orders were received in the month of June. If you broke it down between federal and enterprise, you'd find that enterprise was very linear and federal is very back end loaded.

Dan Fairfax

There was another slight shift. There was -- probably fewer, rated orders from the Federal Government in the second quarter, which also allowed us -- we had visibility to the enterprise business, which we shipped, and we didn't have to scramble to get the federal business out ahead of those enterprise customers.

Erik Suppiger - Signal Hill

Okay. On the -- on the -- on your outlook, you had said that you would expect a relatively strong federal quarter but that -- and that may offset seasonal weakness in North American and European enterprise. If I look at what you did last year, your international revenues grew from June to September. And if I try to do the reverse math, to calculate North American non -- North American non-federal, it looks like that was down.

But if I recall, you had very strong bookings during that time. So I'm just trying to understand. It looks like a very strong federal uptick. And probably not that strong of a downtick seasonally. Are you just being conservative when you say it may offset the seasonal weakness, or is there something else that we should consider?

Dan Fairfax

Well, we like your thinking. But -- and we're certainly hopeful. I think that, we're always cautious in the September quarter because we have had September quarters in prior years that weren't as good as last year. So we think we have good momentum. We think we have good products. We think we're very competitive in the space at this point. So there's lots of things on the positive side and we're hopeful that that's enough to carry the bag.

Erik Suppiger - Signal Hill

Okay. And last one. It sounds like it was a great quarter for the enterprise. Can you talk a little bit about maybe the dollar size of some of those large deals? Are you seeing a significant increase in your large deals these days?

Bobby Johnson

So Erik, this is Bobby. For the enterprise we have deals that are all over the map. All the way from a small wireless access point for a few hundred dollars to -- we even sell some of our MPLS routers to the enterprise. So -- as well as our other bigger V4, V6 routers. So in the enterprise, it's fair to say we had some purchase orders that were on the order of 4 plus million type single POs during the quarter. But that's not the norm. That is the -- obviously the exception.

Erik Suppiger - Signal Hill

And is that considerably larger than what you might have had maybe a year ago?

Bobby Johnson

I wouldn't say all the time considerably larger. We're just seeing the frequency in the FORTUNE 500 customer list substantially growing in relative comparison.

Erik Suppiger - Signal Hill

Very good. Congrats.

Mike Iburg

Thanks, Erik. Next question, please?

Operator

The next question comes from the site of Manny Recarey from Kaufman Brothers. Please go ahead.

Manny Recarey - Kaufman Brothers

Thanks and good afternoon. Two quick questions. Japan, I understand it was -- the market was weak and that's why it didn't meet your expectations. But if you can give a little bit more color why you expect it to rebound this quarter? And then the second question has to do with the G&As. Sequentially it upticked. Can you just give a little color on what happened there and any color on -- to expect what happened last year where it came down from the second to the third quarter? Is that to be expected again?

Dan Fairfax

Okay. So let me talk a little bit to the -- to the G&A. The quarter-over-quarter increase in G&As expenses was related to completing our fiscal 2006 audit. And with everything delayed, we had a fair bit of our -- we had higher audit fees year over year and a lot of that was delayed because the work was done in the second quarter. So that's really the big change there.

Manny Recarey - Kaufman Brothers

And that's helpful. Thanks.

Bobby Johnson

Okay. On Japan, Japan may be a several quarter improvement plan. Ostensibly at the root of a lot of the other networking vendors, challenges in Japan and there are several of us that have had challenges in Japan and this or the previous quarter lies the decision for NTT for the next June backlog and rollout and time period. So that's put a little bit of a freeze on the overall hardware acquisition environment in the overall Japanese market. So we're redoubling our efforts on Japan but I believe for a true robust rebound it will take more than just a single quarter.

Manny Recarey - Kaufman Brothers

Okay.

Dan Fairfax

And there may have been some confusion because that's what I thought I had given in the -- not in the guidance section but earlier on saying there was going to be several quarters for the rebound.

Manny Recarey - Kaufman Brothers

Okay. I was looking for a little bit more color on that. Thanks.

Mike Iburg

Thanks, Manny. Next question, please?

Operator

The next question comes from the site of Troy Jensen from Piper Jaffray. Please go ahead.

Troy Jensen - Piper Jaffray

Congrats on the quarter. Got a quick question on the routing side. Can you tell us at current levels are the routers gross margins on them above or below the Corporate average?

Bobby Johnson

Well, there's two MPLS-enabled routers and then a very big Layer 3 switch. The Layer 3 switch and the big router are at or above the Corporate average. The Metro router is maybe a slightly beneath, depending upon the deal and opportunity. So--.

Troy Jensen - Piper Jaffray

Got it. And then another question. I guess you can't call out specifically which tier 1s you've won, but is there any way you could quantify the number that you have so far for the routing business?

Bobby Johnson

Well, the number that we've listed isn't a number. It's a statement of several. So we're -- we're kind of -- have purchase orders from a handful and we've got interest from another handful.

Troy Jensen - Piper Jaffray

Got it. Okay. That makes sense. And then just a last question. The legal costs. Could you remind me what was that in the second quarter? And does that completely go away here in the third quarter?

Dan Fairfax

You mean the costs associated with the restatement?

Troy Jensen - Piper Jaffray

Yes, exactly. Thank you.

Dan Fairfax

So I guess at this point for -- to complete the investigation, prepare the restated financials, that cost is significantly behind us. We have just a small fraction of legal expense related to the -- the tender offer that we've announced to remediate the 409 A issues for employees who have owed some of those options that had revised measurement dates so that's pretty much behind us.

The piece we don't expect to see a significant cost but we just don't know would be -- until we close off the informal investigation with the SEC and Department of Justice, we don't know where it may go. But we're optimistic that -- with the way things are going in the marketplace with similar companies, that that will be behind us shortly as well.

Troy Jensen - Piper Jaffray

Got it. The last question. I apologize if you gave this already. But can you give me the breakout between chassis and stackable?

Mike Iburg

Yes. The chassis in the second quarter were 71% and the balance was the stackables.

Troy Jensen - Piper Jaffray

Great. Keep up the good work, gentlemen.

Mike Iburg

Thanks again.

Bobby Johnson

Thank you.

Operator

The next question comes from the site of Rich Church from CEUT. Please go ahead.

Rich Church - C.E. Unterberg, Towbin

Okay. Thanks. Nice job on the quarter.

Bobby Johnson

Thanks, Rich.

Rich Church - C.E. Unterberg, Towbin

I think last quarter you said that you had shipped 345 routers MPLS and IT. I was wondering if you could get us the number for this quarter.

Bobby Johnson

Okay. Hold on a second. It would be approximately the same plus or minus about 5%. I don't know if I've got it on me. We can get back to you. It would be approximately the same plus or minus a couple of percentage points.

Rich Church - C.E. Unterberg, Towbin

Okay. And also with regards to services, gross margins. I think in the past you had talked about opening up new service centers to support tier 1s and having to grow into gross margins over the next couple of quarters. Could you just give us an update on where that stands in terms of utilization as there's new service centers?

Bobby Johnson

Okay. So indeed we have made that statement and indeed you saw a little bit of that this quarter, that our service and overall gross margins improved. Now, there will be from time to time a cyclical evolution as we win new accounts. And it may be not just service providers, it may be new enterprise accounts. It may be that Foundry's opening up new geographic territories or just having to service existing bases of customers but we will have to expand our service depots.

And -- as we grow our product lines, we have to prepopulate inventory into service depots as we win new customers we have to do that. So there will be from time to time this cycle of having to expend the money in advance of the revenue for service depots. And that will -- that's kind of indeterminate, but it will be an evolution of the Company.

Rich Church - C.E. Unterberg, Towbin

Is that driven by adding a new customer, or just a matter of refreshing the inventory in the depot?

Bobby Johnson

It's a matter of actually both. And in some cases it's not just a new customer. It's multiple customers.

Rich Church - C.E. Unterberg, Towbin

And is that something that might happen once every few quarters, or annually, or what -- how should we think about it?

Bobby Johnson

Well, we're always refreshing on a continual basis the depots around the world. So that is a continual. But as we either introduce a new product or get a concentration or open up a new territory or win a significant new customer it might skew the results.

But as we get larger, hopefully, as we build more service depots, the addition of a new product line or the addition of a new customer may have less impact because it might be a number on top of a larger base. So that visibility may decrease just depending upon our overall growth and overall size of a particular geographic coverage.

Rich Church - C.E. Unterberg, Towbin

Okay. And one last question. Any new products that we should be looking for in the back half of the year?

Bobby Johnson

Well, we've already announced the 32 Slotters. They all happen in the back half of the year. We don't expect them to have a short-term dramatic revenue impact. They're more of a statement of direction. They're more for our high-end specialty customers. They will have some revenue impact, but overall the impact may be more associated with a drag effect of other products going along with them into an account.

Rich Church - C.E. Unterberg, Towbin

Okay. Great. Thanks. Good job.

Mike Iburg

Thanks, Rich. We'll take our last question.

Operator

Our last question comes from the site of Subu Subrahmanyan. Please go ahead.

Bobby Johnson

Subu.

Subu Subrahmanyan - Sanders Morris Harris

Yes, hi. I guess my question just comes back to the enterprise and federal piece of the equation. So if you looked at last year also you saw the June quarter tick down in federal and come back pretty strongly and it seems that there was some push out of the business.

In terms of enterprise itself, other than seasonal factors, can you just talk about -- just in terms of momentum of product cycle itself, how the factories are going and is there anything over and above seasonality or is there anything abnormal about the seasonality you're looking at for this year?

Bobby Johnson

Well, what we're trying to do is add new salespeople, open up new territories, expand the product line both up and down, we've over the last several years added more wireless products, continued to enhance the Layer 4-7 product portfolio for the enterprise.

So we would hope that we would get really a compound effect of more sales territories, more products, continued repeat business, new wins in -- we'll just have to see how that strategy and execution plays out over time.

Subu Subrahmanyan - Sanders Morris Harris

Got it. And is your book to bill -- if you X out the federal strong orders are pushed out, the enterprise book to bill, the carrier book to bill also be greater than 1.0?

Bobby Johnson

I haven't done the math. Mike?

Mike Iburg

Well, we wouldn't ordinarily give out this level of detail, but I can just tell you that -- yes.

Subu Subrahmanyan - Sanders Morris Harris

Great. Thank you very much.

Bobby Johnson

Carrie?

Operator

Yes.

Bobby Johnson

So -- thank you, and thanks to everybody for taking time to participate today. We look forward to updating everybody on our Q3 results in approximately 90 days. So thank you.

Operator

Thank you. This does conclude today's teleconference. You may disconnect at any time, and have a great day.

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