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Executives

Jane Underwood - Vice President of Investor Relations

Dan Ryan - President, Chief Executive Officer and Chief Operating Officer

Tim Steinkopf - Senior Vice President of Operations and Chief Financial Officer

Analysts

Fred Grieb - Goldman Sachs

Josh Jabs - Roth Capital

Catharine Trebnick - America’s Growth Capital

Jonathan Ruykhaver - ThinkPanmure

Eric Martinuzzi - Craig Hallum

Rob Owens - Pacific Crest

Joe Maxa - Dougherty & Company

Todd Raker - Deutsche Bank

Secure Computing Corporation. (SCUR) Q2 2008 Earnings Call July 28, 2008 4:30 PM ET

Operator

Welcome to the Secure Computing Corporation Second Quarter 2008 Results Conference Call. All participants will be able to listen only until the question-and-answer session, which will follow today’s presentation. (Operator instructions). Today’s call is being recorded. If there any objections please disconnect at this time.

I will now turn the call over to Ms. Jane Underwood, Vice President of Investor Relations.

Jane Underwood – Vice President of Investor Relations

Good afternoon. And thank you for joining us to discuss our second quarter results. On the call with me today are Dan Ryan, our CEO and Tim Steinkopf, our Senior Vice President of Operations and CFO.

Before I turn the call over to Tim, I’m going to make a cautionary statement regarding forward-looking statements. During the course of this call and the question-and-answer session following management’s remarks, we will make forward-looking statements that involve risks and uncertainties. Such forward-looking statements are subject to the Safe Harbor created by the Private Securities Litigation Reform Act of 1995. These statements include, for example, statements regarding future results such as guidance for the third quarter, third quarter revenue, gross margin, operating expense, tax expense, interest and other expense, shares outstanding, earnings per share cash flows and statements about our sales pipeline, and the success and availability of our products.

Our actual results could differ materially from the forward-looking statements. Factors which could cause actual results to differ include, for example, risks related to the competition in the security industry, changes in customer requirements, delays in product development and the other factors and risks identified in our press release and in our SEC filings. We do not undertake any obligation to correct or update any forward-looking statements that may become inaccurate.

Now, I’d like the turn the call over to Tim.

Tim Steinkopf – Senior Vice President of Operations, Chief Financial Officer

Thank you, Jane. Our second quarter billings, non-GAAP revenue and non-GAAP EPS all either met or exceeded guidance. Earnings for Q2 were $73.9 million or a 5% year-over-year increase, non-GAAP revenue for the second quarter was $69.2 million a 9% increase over the prior year. Non-GAAP net income for Q2 was $3.9 million or $0.05 per fully diluted share. As a reminder our non-GAAP financial measures are reconciled to GAAP in the table at the end of today’s press release.

In Q2 we continued to experience softness in our North American commercial business, as customers delayed purchasing decisions resulting from the difficult macro economic environment. Importantly however, our federal team had strong performance as the US Federal government represented 25% of billing, which exceeded our guidance. Domestic billings excluding the US Federal government were 39% of total billings and international billings for the second quarter were 36% of total billing.

In the second quarter billings for our gateway security products were 89% of total billings and billings for our identity and access products were 11% of total billings. We closed five individual transactions greater than $1 million and an additional 115 deals over $100,000. Deferred revenue increased $11 million or 6% sequentially. At end of June, the total deferred revenue balance was $185.4 million. Non-GAAP gross margin was 70% of revenue, the lower than expected gross margin was primarily due to product mix. We experienced the higher volume of lower margin firewall revenue including higher than anticipated snap year sales along with lower than expected OEM royalty revenue.

Non-GAAP operating income for the quarter was 6% of revenue. In Q2 we generated $2.9 million in cash from operations, which was offset by capital spending of approximately $5 million, the company’s cash in restricted cash balance was $21.6 million of June 30th.

Now, I would like to turn to our outlook guidance for the third quarter, which is based on current expectation. The following statements are forward-looking and actual results could differ materially. For the third quarter, Non-GAAP revenue is expected to be in the range of $64 million to $68 million. Non-GAAP gross margin is anticipated to be approximately 71% to 73% of non-GAAP revenue. Non-GAAP operating expenses are expected to be in the range of $43 million to $44 million. Fully diluted weighted average share count is expected to be approximately 75 million shares. Non-GAAP tax expense, which is also approximate -- our actual cash outlay for taxes is expected to be approximately $300,000 to $500,000. Interest and other expenses are expected to be approximately $800,000. In our Q3 non-GAAP earnings per share is expected to be approximately $0.04 to $0.07 per fully diluted share.

In Q3, cash generated from operations is expected to be approximately $7 million to $8 million and we expect Federal billings for Q3 to account for 20% to 25% of total billings.

At this time I’ll turn the call over to Dan.

Dan Ryan - President, Chief Executive Officer and Chief Operating Officer

Thank you, Tim and good afternoon. I apologize in advance for my voice which is virtually gone at this moment but I hope that you will able to hear me. My comments will cover key take-aways for the second quarter and an update on the growth plan that we talked about in our last call. Q2 was a solid quarter from the top line perspective, while the North American commercial market was challenging, our sales team did a great job of navigating economic headwinds and meeting or exceeding our targets.

In particular I am pleased with the strong performance in our federal business and expect to continue to see strong results from our federal team in the second half of this year. Our gross margin performance was below expectations and while we understand unique set of circumstances that caused the decline, we are not comfortable that there will be a full rebound in the next quarter. We closely monitor our gross margin performance with the strong emphasis on improving it and we will continue to be vigilant in managing our operating expenses. Consistent EPS growth is paramount and we will do whatever it takes to deliver strong bottom line results.

In the quarter we made excellent progress on directing our resources and efforts to the products and markets that should feel Secure as growth. These are Secure Internet gateway solutions, or Secure web and Secure mail, and high assurance network application security or Secure Firewall products. Last quarter we made two important product announcements that are central to our strategy. First we introduced a Secure hybrid delivery architecture for web and mail. This approach will ultimately allow customers to provision unified secure gateway services across hosted, virtual and appliance platforms, enabling them to efficiently protect their organizations against today’s emerging and morphing threats, while leveraging the service delivery platform of choice.

Second, we introduced the secure web protection service, the industry’s first hosted web security solution that provides outbound filtering, pre-emptive detection and reputation-based protection from our and other web borne threats. Combined with our appliance solutions, this service provides an excellent hybrid approach for enterprises that have multiple users or for mid size enterprises that want only call-based services. Unlike many other entrants in this market, we own the key technology and we have proven capabilities in hosted security with our TrustedSource Reputation system.

We also plan to launch a hosted mail security offering, leveraging the same infrastructure in the future. Secure Firewall currently maintains a leadership position in the high assurance segment of the firewall market where the protection of high-value networks, applications and assets is critical. While we continue to see strong opportunities in our traditional markets including financial services and government, we are also capitalizing on the Secure Firewall franchise by targeting adjacent markets with similar critical infrastructure requirements including energy and utilities, chemical, and transportation industries.

We will continue to align our company and to invest in markets where we either have or have the potential to establish a clear leadership position. Although, the economic conditions are trying, we see this period as an opportunity to organize and emerge as a stronger company and in a better position relative to our competitors.

In closing I am excited to be leading Secure. We have great products and people, loyal customers and partners and a clear vision for where we want to take our company. We still have work to do but we’re committed to consistent, predictable top line and EPS growth, combined with strong cash generation.

Operator, we would now like to open the call to analysts’ questions.

Jane Underwood – Vice President of Investor Relations

Mary?

Operator

Yes, this is Mary.

Jane Underwood – Vice President of Investor Relations

Yes, we would like to open the call to questions now.

Question-and-Answer Session

Operator

Okay, thank you. We will begin the formal question-and-answer session for sales side analysts who cover the company. Please limit your questions to one per person. (Operator Instructions). And one moment for the first question please. Just another moment please.

Jane Underwood

Mary, are we going to have questions now?

Operator

Yes, they are still queuing up. Our first question comes from Sarah Friar with Goldman Sachs. Sarah your line is open.

Fred Grieb

Hi this is actually Fred Grieb for Sarah. Two quick questions for you. One, you guys said that you saw some weakness due to the macro-environment in North America. I am curious if you’re starting to see any weakness in your international geographies particularly Europe? And then, the second one to that have you seen any impact in either geography on sales just because of the Finjan lawsuit?

Dan Ryan

The first question, I think, of the three markets, we probably saw the most strength in APAC, probably the second EMEA, and, third North America. Of course, federal being the strongest of all those at this point. Latin America I would put in the okay bucket also, not particularly strong.

With respect to Finjan, we feel, we have had the one deal that we talked about last quarter that Finjan was used as the reason for not selecting Secure. That, to this point, is still the only one I’m familiar with.

Fred Grieb

Okay. And one follow up. Can you give us an update on just how far away you think you are to having a complete work-around for the patent that’s at issue with Finjan?

Dan Ryan

Yeah, that’s a tough question to answer a complete work around. But, step 1 is that we have many things in that product. One small piece of which allegedly infringes. Obviously we’ve taken the steps to remove that so that should we need to we can stop shipping the product with that alleged capability. Second thing, is of course we are doing all kinds of other things to continue to add value to that product related to both malware and other areas in a web gateway product. So I think, we are in a position to do what we have to do to respond either way.

Fred Grieb

Great, thanks a lot.

Operator

And our next question comes from Josh Jabs with Roth Capital. Sir, your line is open.

Josh Jabs

Hi, good afternoon.

Dan Ryan

Good afternoon.

Josh Jabs

Just looking here at the numbers, deferred was up and gains on deferred and cash was little more pretty healthy also billings were little ahead of our numbers. So then, I’m looking at the Q3 guidance and I think that actually comes in a little below expectations and I’m just wondering if you started to see any impact from the shift to subscription, or if there is something else going in to Q3 that has you a little more conservative?

Tim Steinkopf

No, I think actually Josh it’s more just a function of the math. We had a little bit lower expectation in our gross margins and when we looked at our gross margin forecast for Q3 we think it will be up from Q2 but, somewhere below maybe historical levels. And therefore that’s kind of flow into the bottom line. So, all the other metrics as you state are actually all very good and coming back nicely from the first part of the year. But, EPS maybe down just a bit because of the impact of gross margins. And of course, we will be working hard on managing gross margins and managing expenses.

Josh Jabs

So, I’m just you know, and looking at the math there your billings number was pretty healthy in the quarter and I guess to get to the same in order to get your revenue range looks like something else has to be going on the revenue side or with the billing whether it’s shift to the subscription or whether something was pulled in from Q1 into Q2 that give you a little bump in Q2?

Tim Steinkopf

Well, I’m sure what you are looking at, but, I’m going to interpolate here. I think maybe what you’re saying is the guidance for Q3 from Q2 is flattish, and so, what we’re really expecting is that we are going to have good federal quarter but EMEA’s in its summer quarter, and things of that nature. So, I don’t think there is any, necessarily overall impact it just the inner workings, and that’s how the Q3 looks.

Josh Jabs

Okay. Can you give a little bit more color on what lines of business tended do while we are in the quarter; any thoughts on you know possibly breaking out billings on a more detailed level going forward?

Dan Ryan

Yes. Sure. Just in a general tone or general sense, Secure Web and Secure Firewall had strong quarters year-over-year, Stronger than the other three product lines. To your second question, we are considering providing another level of detail on that in the future, and we are actually looking into that right now. We are not doing it this quarter but its something that we were considering pretty heavily.

Josh Jabs

Okay. And then, finally, on the CapEx is up a bit, expectations for the rest of the year, and maybe what went on in the quarter?

Tim Steinkopf

No, in CapEx we did embark upon in the first half of the year we had a couple of office moves, things we had to take care of. But, in the second half of the year we expect CapEx to be more in the $2 million to $3 million per quarter range. So, quite a bit down from the first half of the year.

Josh Jabs

Okay. Great, thank you.

Tim Steinkopf

Thanks, Josh.

Operator

Our next question comes from Catharine Trebnick with America’s Growth Capital. Catharine, your line is open.

Catharine Trebnick

Good afternoon.

Dan Ryan

Hi, Catharine.

Catharine Trebnick

I have a question on, in ’07 you were very aggressive about retiring the debt on your balance sheet and cash flow, can you kind of discuss what your strategy is going forward on that, I believe you retired $44 million in ’07?

Tim Steinkopf

Yeah, that’s correct. In total we retired $46 million out of the $90. So, we are down to a balance of $44 million at this time. Presently we have a cash balance of low 20s, our guidance for Q3 cash from operations is $7 million to $8 million so we are targeting something closer to $30 million by the end of September. At this time it is senior management’s and the Board’s collective decision that we want to build up a little bit more cash on the balance sheet, we don’t have a specific number in mind but we are going to target something little bit higher than where we are at. And then, at that time we would be looking again at making some debt payments but at this time in the short-term we are going to put some more cash on the balance sheet.

Catharine Trebnick

Alright, thanks.

Operator

Our next question comes from Jonathan Ruykhaver with ThinkPanmure. Your line is open.

Jonathan Ruykhaver

Yes, hi, guys. Good afternoon.

Dan Ryan

Hi, Jonathan.

Jonathan Ruykhaver

I guess my first question is just around the gross margin guidance. You know, you stalked to the higher volume of low margin business, is that just your expectation going forward that you’ll see a higher volume of the SnapGear product or is there something going on, on the price side that concerns you?

Dan Ryan

No, I think, what we saw was dated some very low-on issues for the lot of the margins on from the firewall business that, for example firewalls had a lower margin, our prices been revenue-adjusted going forward. I think we reduced OEM business, we don’t anticipate that stays reduced forever, but it was definitely lower than it has been historically. So, as early as that we know we’ll come back or we believe we’ll come back, you shouldn’t say no. And the, on the mix itself, I mean, it could always have a tendency towards the lower margin mix, we can’t completely predict that. But, I think in terms of pricing pressure, we didn’t see anything that was unusual or relative to prior quarters, we didn’t see any big last minute push at the end of the quarter to get deals in. now we are just kind of course the business on the pricing. That’s not to say that there is not pricing pressure out there because certainly there is.

Jonathan Ruykhaver

Right. So, just to reiterate I guess, you didn’t see any significant or out of the ordinary pricing within the federal vertical that might have contributed to that?

Dan Ryan

Other than the specific, couple of specific projects that we had well margin contract in place already that we’ve adjusted you know, we’ve one of those ruggedized firewalls.

Jonathan Ruykhaver

Okay. Okay, and then Tim, I guess this might be more feared. The cost saving initiatives that you talked about early on in 2Q, have those been fully implemented at this point?

Tim Steinkopf

Yes, they have. Yes.

Jonathan Ruykhaver

Okay. So, I’ve just surprised, I guess sequentially it looks like offbacks in total in the June quarter was up about a million relative to last quarter? So, incremental spending is going on?

Tim Steinkopf

No, in the Q2 quarter we did unfortunately experience a high level of legal fees related to Finjan and some other things. Those will come down a little bit in Q3 and we are certainly very proactively trying to manage those costs. But obviously, we can’t do away with legal cost entirely. So, the expenses that we can control relative to people and things of that nature, we’ve accomplished those savings, some of the things that you are seeing are on some expenses that a little bit less controllable just based on current events.

Jonathan Ruykhaver

Okay. Tim, I didn’t see that number in the footnotes, were they published? The Finjan related litigation?

Tim Steinkopf

What we’ve done on legal now, we had in Q1, we broke out legal as a one time expense because we actually went to trial with Finjan. It was kind of a one time item. Going forward we are kind of into the ongoing defense of that situation. So, legal is included in the guidance and results entirely, we are not breaking those out as one time expenses. If we had broken out legal as a one time expense, the excess legal, our results would have been at least a penny better if not even potentially round in up to 2 pennies better.

Jonathan Ruykhaver

Great, okay. Okay, I guess just final quick question. You announced the web hosted service in the quarter, can you talk about the channel that you are using to sell that, is it the traditional reseller base or are you also targeting service providers?

Dan Ryan

Yeah, that’s a good question, both. We are obviously early on in the development of the channels for that product. We are using both our traditional reseller base which we’re developing quite a bit of interest from the resellers. But, also going after the SSPs or service providers with a white label or private label offering that we will allow them to resell, so, we are doing each of those and again we are early on in the channel development so I can’t talk you know, really have any specific results for you but that is exactly the strategy.

Jonathan Ruykhaver

Will the cash be collected up-front or will you bill as this service is delivered?

Dan Ryan

Yeah, typically it’s quite up-front like any kind of subscriptions that we have. We get a year up front and then we take that in advance.

Jonathan Ruykhaver

Okay, good. That’s all I have, thanks guys.

Tim Steinkopf

Thanks, Jonathan.

Operator

(Operator Instructions). And our next question comes from Eric Martinuzzi with Craig Hallum. Your line is open, sir.

Eric Martinuzzi

Thanks. First half, congratulation to you Dan, on you being named the permanent CEO.

Dan Ryan

Thanks, Eric.

Eric Martinuzzi

The organizational changes that you made, where are you in that process, how many because I know there’s been some senior level positioned that you recently filled is your, are you staffed up the VP level, if not where you’re looking to hire? And then I have a follow up on the channel?

Dan Ryan

I think that we are -- I wouldn’t say we are ever fully staffed up. We’re always looking to hire great people, but we probably have a couple of key VP jobs left, one general manager for one of the product lines and one that we haven’t, we’re not able to announce the person yet but that he going to be joining us next week, which is a VP from the North America channels. That will be somebody that you are familiar or at least more importantly that our partners are familiar with and so we are looking forward to get that out there. Those are probably the two really main in our openings that we have right now, we will continue to add to the team of course.

Eric Martinuzzi

Okay. And then, the follow up was on the international channel, you did I think you elevated one of your international or your regional VP GMs is that positioned been back or is that the one you’re talking about?

Dan Ryan

I’m not familiar Eric with that.

Eric Martinuzzi

You elevated -- it may have been the European ops was elevated to worldwide ops?

Dan Ryan

Oh, no. Our operations guy in the UK was a sales director and joined sales director and joined the worldwide operations team, I think is what you’re referring to. That was kind of a lateral change, I guess you would call it into different organization.

Eric Martinuzzi

Okay, but he has already been backfilled?

Dan Ryan

No, he has not been backfilled. He has not been backfilled. That is another regional level director that needs to be filled, you’re correct.

Eric Martinuzzi

I see. Okay, thanks.

Tim Steinkopf

Thanks, Eric.

Operator

And our next question comes from Christopher Crowe with Pacific Crest. Sir, your line is open.

Rob Owens

Yeah. Hi, guys its actually Rob Owens here.

Dan Ryan

Hi, Rob.

Rob Owens

Wanted to revisit the gross margin because I guess if we look at the last couple of quarters, we have seen weakness starting in the fourth quarter, if I remember back correctly, it was kind of onetime in nature a special deals that you hope it, get leverage ongoing forward. But, now we had two more quarters and I think have been sub average relative to what you guys been used to. So, do you think, we need to revisit the potential gross margin profile for the company or there other things in works that can potentially drive that higher?

Dan Ryan

Well, so let’s just revisit, so in Q4 gross margins were less than expected and it was very specific to two large deals that we knowingly priced aggressively due to the follow on business opportunities and that has actually played out, we are winning business in those areas. So, that’s played out as expected. In Q1 if you go back and look margins actually came back up, I think.

Rob Owens

The overall margin did, but if I, Tim as I look at product gross margin, I think it was up 90 basis points sequentially. So, hardly a recovery I guess relative to what you saw before?

Dan Ryan

Well again, we are always predicting gross margins on a macro basis. Actually, that’s a perfect segue - you’re my straight man, Rob, it’s a perfect segue into the forecast for Q3. What we do is we take the actual pipeline. It is a lot of mass in forecasting but we take the actual pipeline of deals, we take the weighting for that pipeline and then we apply historical markers etcetera to predict gross margins going forward. And that’s the entire expectations on revenue including coming off deferreds etcetera, etcetera. So, and then when we look at Q2 specifically, we went back and did analysis of what was down, now we guided Q2 to 73 to 75. The reason we guided potentially down of couple points was we were predicting that our OEM business would be a little bit less than normal and OEM is very high margins. What occurred was OEM did do that and actually went a little bit beyond that. The OEM pipeline is good, there is a lot of activity, but OEM deals are often very difficult to predict when they close, and when they actually start to produce revenue. So, we knew the OEM was going to be down, we predicted the margins to a lower range and then OEM actually came in even slightly worse then that.

The other two things that impacted margins in Q2 were specifically related to the mix of appliances shipped. We had a little higher mix of SnapGear, which has historically had a little lower margin and we had a little higher mix of some lower margins Sidewinder appliances and there is some good and bad news in the Sidewinder appliances. On the bad news we shipped a couple of large orders that were upgrade or refresh cycles of hardware. So, the upgrade pricing is little bit more aggressive than brand new box price, since we get a little bit lower margin, so that’s the bad news. The good news is we had a further long term commitment from some very large customers in placing some very large upgrade orders, so that’s the good news. So, when you tear apart margins you look at Q4, you look at Q1, you look at Q2 they are, once you get to the actual results you can get into this specific details as to why margins are up, down or flat. And, so therefore, now just to finish off your question when we look forward again we’ve applied our models to the pipeline but as Dan pointed out -- so probably two things one is it’s all modeling so it’s some of the times difficult to predict the actual results but two maybe to your point the reason we are guiding 71 to 73 is to actually bring it down a couple of points to be a little bit more conservative going forward because it appears that margins are moving around a little bit more on us in the half may be historically.

Rob Owens

Okay and then a follow up if I may with regard to your federal business this quarter in your performance is there any state local in that number is that all federal business and could you elaborate on any civilian agencies DOD are exactly where that’s coming from, the strength?

Dan Ryan

I think the federal business is outside of US federal, we don’t include central governments of other nations in that number. So, we do quite a bit of business now we are starting to get the benefit of a little bit of I think reputation where we are seeing business in Japan, Singapore, UK, Canada and central government as well that’s also not in that number. So, I think that’s pure federal government. I would say -- I don’t know the exact numbers, the majority of that would be DOD and in talent would not be civilian agencies although there is, of course some of each.

Rob Owens

Great, thanks guys.

Operator

Our next question comes from Joe Maxa with Dougherty & Company. Sir your line is open.

Joe Maxa

Thank you. Last quarter you have a number of projects delayed at the end of the quarter kind of slipped in the last six business days, that you know due to the overall economy you talked about weakness in the economy, are you seeing a very similar pattern this quarter or were you more aware of deals and much earlier in the quarter whether they were going to make it or not?

Dan Ryan

I think we definitely not see the degree of slippage movement between quarters we saw in the prior quarter I mean, its roughly back to normal. We always expect historically to have a certain amount of business slip. I think in the prior quarter we had something like three or four times in normal business slip and so I think we are back to normal levels.

Joe Maxa

Then would you expect that going forward what you are seeing today?

Dan Ryan

That’s how we plan to do.

Joe Maxa

Okay.

Dan Ryan

So, now we are trying of course control the purchase orders, I mean that’s how we are operating on.

Joe Maxa

And so far if sounded like you really haven’t seen this type of weakness in Europe at this point?

Dan Ryan

I would say we haven’t seen weakness that we see in North America and Europe is still probably much size of North America has been but I wouldn’t say that’s is as strong for APAC right now for us. Of course, smaller numbers in APAC, too, but that’s kind of the order we see the strength to announce that on APAC, then EMEA, then North America.

Joe Maxa

You had a handful of million dollar plus deals what’s the average size deals when you say over million dollars?

Tim Steinkopf

On average Joe it’s one to two. We occasionally get a deal above two or three and then a very, very, occasionally I think one or one twice I think it two in the last several years or we get some thing bigger than but so in normal when we take about five deals over million those are mostly between $1 and $2 million.

Joe Maxa

Okay, thank you.

Tim Steinkopf

You bet.

Operator

And our last question comes from Todd Raker with Deutsche Bank. Sir, your line is open.

Todd Raker

Hi guys can you hear me?

Tim Steinkopf

Yes, Hi Todd.

Todd Raker

Well, just quick question in terms of the kind of macro environment, can you talk about how much of this you view as macro versus kind of competitive pressures and I guess just compare and contrast because some of your peer group in the security business seems to be holding up relatively well over the last two quarters, I am just curious in terms of why you guys are seeing little bit more pain then some of the competitors out there?

Dan Ryan

No I don’t know if we are, but I think that I don’t feel like we are loosing any more business from head-to-head against our competition. I think we still do quite well there in most cases, we have got part of this as macro, part of this to we got to better execute them, I mean to be direct we have got to do better job ourselves as well. So, we won’t blame everything on the economy. Certainly, we can improve our situation by improving our leverage in the channel of our sales force. That’s why we are focusing on these key route there instead of spreading across of many products as we have in the companies. So, we are doing the things to try and improve our leverage and also we will take responsibility for that, but I do think that the economy has added a little bit of flavor to the discussion right now. I would say from a competitor perspective, run rates are where they were. Just go with IronPort on the mail side does quite well. We see them very consistently there. They have been a force, I think, since buying IronPort for share on the gateway business, it’s the same competitors that we always had.

In the firewall business, it’s the same firewall competitors except that in the areas where we play particularly well, we have less competition. In the areas that we are focused on now, the high assurance areas, we have fewer competitors, I would say, or fewer meaningful competitors.

Todd Raker

Okay, and then can you give us little bit intentions of the OEM royalty stream and it was weak this quarter. Is that specific to the web filtering business or is that a broader OEM royalty?

Dan Ryan

It’s primarily the web filtering business, a small filter web reputation business. We have, as Tim mentioned that’s been I guess a little less consistent or predictable than we had historically. We do have some visibility in coming quarters with the pipeline certainly a business there it’s not like we’re seeing that the business is gone, it just about a quarter and we expect to recover that. And we are going to kind of do that, it is a good business strong, we are going to also add the ability to offer hosted web security which will be the really the next OEM-able or private label product that we hope to grow in some of the next couple of years as well.

Todd Raker

Okay, thanks guys.

Dan Ryan

I guess that’s it. So, we’d like to wrap up and thank everybody for joining the call, for putting up with my voice, and apologize for that again. But we look forward to talking in 90 days. We hope we make as much progress then as we have in the last time. Thank you.

Operator

Thank you. That concludes today’s conference.

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