F5 Networks, Inc. (NASDAQ:FFIV) F1Q12 Earnings Call January 18, 2012 4:30 PM ET
John Eldridge - Director of Investor Relations
John McAdam - Chief Executive Officer, President and Executive Director
Andrew Reinland – SVP and CFO
Mark Anderson - Senior Vice President of Worldwide Sales
Dan Matte - Senior Vice President Of Marketing & Business Development
Karl D. Triebes - Chief Technology Officer and Senior Vice President of Product
Manuel Rivelo - Senior Vice President of Security and Strategic Solutions
Paul Silverstein - Credit Suisse
Tal Liani - Bank of America/Merrill Lynch
Alex Kurtz - Sterne Agee
Ryan Hutchinson - Lazard
Sanjiv Wadhwani from Stifel & Nicolaus
Alex Henderson - Miller Tabak
Brent A. Bracelin - Pacific Crest Securities, Inc.
Bill Choi - Janney Montgomery Scott
Troy Jensen - Piper Jaffray
Jeff Kvaal - Barclays Capital
Mark Sue - RBC Capital Markets
Simon Leopold - Morgan Keegan
Brian Modoff - Deutsche Bank
Prianka Chopra - Bush Securities
Good morning and welcome to the F5 First Quarter financial results conference call. (Operator instructions.) I’d now like to turn the call over to Mr. John Eldridge, Director of Investor Relations. Sir you may begin.
Thanks operator and welcome to all of you to our conference call for FQ1 2012. Speakers on today’s call are John McAdam - President and CEO of F5, Andy Reinland - Senior Vice President and Chief Finance Officer. Other members of our exec team are also with us to answer questions following the prepared comments. If you have questions after today’s call please direct them to me at 206-272-6571.
If you don’t have a copy of today’s press release it’s available on our website at www.F5.com. In addition, you can access an archived version of today’s live webcast from the Investor Relations Events Calendar page of our website through April 18. From 4:30 today until midnight Pacific Time January 19 you can also listen to a telephone replay at 800-219-6381 or 402-220-3807.
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 risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in our quarterly release and described in detail in our SEC filings.
Before we begin I also want to remind you that F5 has no duty to update any information presented in this call.
Now I’d like to turn the call over to Andy Reinland.
Thank you John. For FQ1 2012 F5 achieved sequential revenue gains and solid year-over-year growth exceeding both revenue and earnings guidance. Revenue of $322.4 million which exceeded the high end of our $315 million to $320 million guided range grew 2.5% from the prior quarter and 20% year-over-year.
GAAP EPS of $.83 per diluted share was above our guided range of $.79 to $.81. Excluding stock based compensation expense, Non-GAAP EPS of $1.03 per diluted share was also above our guided range of $.99 to $1.01.
Product revenue of $196.6 million grew 15% year-over-year and represented 61% of total revenue. Service revenue of $125.9 million grew 29% year-over-year and accounted for 39% of total revenue. Book to bill for the quarter was greater than one.
On a geographic basis all regions contributed to the company’s solid year-over-year growth. Accounting for 59% of the total, revenue from the Americas grew 20% from FQ1 2011.
EMEA, which represented 21% of revenue grew 14% from Q1 of last year. APAC accounted for 14% of revenue and grew 28% year-over-year. And Japan contributed 6% of revenue, a 22% increase year-over-year.
During Q1 our application delivery networking business contributed $316.9 million. This compares to $307.3 million in Q4 and $261.7 million in Q1 a year ago.
Revenue from our ARX file virtualization business was $5.5 million compares to $7.3 million in Q4 and $7.2 million in Q1 of last year.
Telco was our strongest vertical in Q1 representing 23% of total sales. Financial was 21%, technology 17% and government was 9% including US Federal which accounted for 4% of the total.
In Q1 we had two greater than 10% distributors, Avnet which represented 17.9% of total revenue and Engro Micro which accounted for 13.7%.
Driven by exceptional strength and software sales, our GAAP gross margin in Q1 was 82.8%. Excluding approximately $2.5 million of stock based compensation expense, non-GAAP gross margin was 83.5%.
GAAP operating expenses of $167 million were above our target range of $161 million to $165 million. Excluding $19.6 million of stock based compensation expense, non-GAAP operating expenses were $147.5 million.
GAAP operating margin was 30.9%. Our Non-GAAP operating margin, which excludes stock based compensation expense, was 37.8%. Our GAAP effective tax rate for Q1 was 34.6%. Excluding stock based compensation our Non-GAAP effective tax rate was 33.6%.
Turning to the balance sheet. Cash flow from operations was $131.9 million contributing to total cash and investments of $1.1 billion at quarter end. Free cash flow for the quarter was $126 million. Capital expenditures for the quarter were $5.9 million and depreciation and amortization expense was $5.8 million.
ESO at the end of Q1 was 52 days. Inventories were $17.5 million. Deferred revenue increased 11% sequentially to $380 million.
We ended the quarter with approximately 2615 employees, an increase of 125 from the prior quarter.
During Q1 we repurchased approximately 320,000 shares of our common stock at an average price of $107.65 per share for a total of $34 million. Approximately $332 million remains authorized under the current share repurchase program.
Looking ahead to Q2, based on our solid year-over-year growth, the strength of our pipeline and the productivity of our sales organization, we believe F5 will continue to generate sequential revenue growth throughout fiscal 2012. We remain confident in achieving revenue growth of at least 20% for fiscal year 2012 and expect to see acceleration in year-over-year product revenue growth in the current quarter.
Our revenue target for FQ2 of 2012 is $332 million to $337 million. We expect GAAP gross margin in the 82% to 83% range; including approximately $2.5 million of stock based compensation expense. We anticipate GAAP operating expenses in the range of $170.5 million to $174.5 million. This includes approximately $20.5 million of stock based compensation expense.
Our GAAP EPS target is $.84 to $.86 per diluted share. Excluding stock compensation our non-GAAP EPS target is $1.05 to $1.07 per diluted share. We are forecasting an effective tax rate of 35%. Excluding stock based compensation we expect a non-GAAP effective tax rate of 33.5%.
We plan to increase our head count by more than 125 employees in the current quarter. We estimate our DSO will be in the upper 40-day range. We expect inventory levels within a range of $19 million to $21 million. And we believe our cash flow from operations will be in excess of $100 million reflecting a large sequential increase in our federal tax payments as is customary in our FQ2.
With that I will turn the call over to John McAdam.
Thanks Andy and good afternoon everyone. I was very pleased with our Q1 results, which have given us a sold start to fiscal 2012. All major regions may have to exceed our internal sales forecast. From a sales perspective, North America produced solid year-over-year growth. Our relatively weak performance in our federal business was more than compensated for by strong performances in both our North American enterprise and service provider businesses.
I was also pleased with our results in APAC and EMEA and especially in Japan where we continue to see improvement in deal sizes and the current penetration. Our services business had another excellent quarter exceeding both revenue and profit goals as well as coercing a very significant increase in deferred revenue of approximately $37 million.
Sales of the new mid-range VIPRION 2400 products were very strong in the quarter and sales from the entire VIPRION family almost tripled from a year ago. The combination of VIPRION sales and the increase in our software module attach rate have been major factors in obtaining deal sizes at record levels.
TMOS Version 11 continues to gain traction with a lot of interest in features like VCMP for multiple software licenses and IOPS for application optimization and deployment.
The IOP functionality in V11 is proving to be very popular with our customers. Especially for those deploying Microsoft’s Exchange and SharePoint applications. One example of the IOPS is a customer who prior to the introduction of IOPs needed a full week to set up an exchange environment within the network. By using an IOP the same customer has now reduced the set-up time to only five minutes. IOPs give our customers the ability to access the sole capabilities in part of our products which we believe will generate additional deployment and sales opportunities.
We also opened a second technology center in London during the quarter to compliment our facility in Seattle. F5 Technology centers enable our customers and perspective customers to see how F5’s products will operate in their own networking environment.
I’m very pleased with the number of customer engagements that have already occurred at the London technology center and I believe this is a great showcase for (inaudible) and effectiveness of our solutions. IOPs are the most frequently requested demo from people visiting the technology centers.
In addition to the growth we have enjoyed with our hardware based solutions I’m also very pleased with the sales of software only virtualizations of our products, which have increased 149% year-over-year. F5 has introduced the most comprehensive set of virtual product additions in the market and I believe this has enabled us to significantly expand our addressable market and offer new and exciting capabilities to our customer base.
We also saw strong field momentum with our security products in the quarter. Our application firewall solution, the ASM module, had its best ever quarter and we also experienced good sequential growth with our Edge Gateway and APM access solutions. We achieved some important milestones with our security strategy last quarter including ICSE network firewalls application for TMOS Version 11. F5 was also positioned in the leaders quadroon of Gartner’s Magic quadrant for SSLVPNs.
You may also have seen our recent press release announcing that our big AP edge client has the industries’ first SSLVPN solution that provides comprehensive security and mobile access for all devices running Android 4.X operating systems.
F53 downloadable client enhances more values of productivity by providing accelerated client access to corporate resources via a full SSLVPN connection. We have already announced similar functionality for the Apple IOS iPhone environment.
TMOS Version 11.1 was released in the quarter and included a number of features specifically designed for the security market under Telco and service provider customers. Version 11.1 also included a trial version of our VPI functionality.
Over the next few quarters we will be expanding these features to include full VPI capability, advanced Telco oriented iRules, DNS cashing and other features requested by our Telco and service provider customers.
Upcoming product releases includes the new Senator Blade for the VIPRION 4400 platform which will double the performance of the current high-end PB200 VIPRION blades. We believe this new platform will be the highest performing ADC currently available. An eight-slot version of this platform is expected later in the year and will double the performance of the Senator Blade platform.
As we mentioned at the analyst and investor meeting in November, we will start to refresh all our 1U and 2U appliances this year leveraging the technology that was developed for the VIPRION 2400.
With our virtual addition we now support Xen and Hyper-V hyper visors. All our software modules will be supported as virtual additions this year and we are continuing to develop new features for our centralized management system to better support application scalability and cloud environments and virtualize data centers.
Finally towards the end of the calendar year we expect to deliver significant new security capabilities with our Topaz project, including a network firewall, protocol protection and enhanced D-DOS and application security.
F5 solutions are being used more and more in data centers throughout the world as strategic control points to secure and optimize mission critical applications. With our expanding addressable market in areas like security and service providers, we intend to continue to aggressively invest in our sales resources, services business and our development facilities.
As far as the outlook is concerned Andy indicated that we expect to see continued sequential growth in the current quarter. As we mentioned at the start of the year, one of our important financial objectives is to deliver accelerating product revenue growth. Assuming no major change in the micro-economic environment, we expect to deliver product revenue growth acceleration in this coming quarter.
We also continue to target year-over-year total revenue growth of at least 20% in fiscal 2012. Our current tight line of business is very strong and with our technology leadership position we enjoy world class competitive win rates in all our major markets. As I mentioned earlier, we believe that TMOS V11 and new products like the VIPRION 2400 will continue to be a key goal driver throughout fiscal 2012.
The F5 team should be proud of the great start we’ve made in fiscal 2012. I’d like to take this opportunity to thank the entire F5 team and our partners and look forward to the continued support for the year.
So with that we’ll now hand the call over for Q&A.
Thank you. We will now begin the question and answer session. (Operator Instructions.) Our first question is from Paul Silverstein, Credit Suisse. Your line is open.
Paul Silverstein - Credit Suisse
Thanks. John and Andy can you talk about visibility and linearity in the quarter and how your visibility looks today compared to perhaps 90 days ago?
Yeah. I think it’s very comparable to 90 days ago. We usually talk about for the current quarter, you know, we get down to the deal level and we think we have good visibility on that. And then even six months or two quarters out we still think the visibility’s pretty good. So I don’t think it’s changed much.
And the seasonality was pretty normal for Q1 as well. There was nothing extraordinary there.
Thank you. Our next question is from Tal Liana, Bank of America/Merrill Lynch. Your line is open
Tal Liani - Bank of America/Merrill Lynch
Good quarter. I want to ask about deferred revenues. Deferred revenues went up pretty nicely year-over-year and sequentially. Can you elaborate on what’s behind it? Is it mainly service renewal timing? Is it seasonal or did you see also growth beyond seasonality? Thanks.
Yes the deferred revenue, the end of this quarter, the end of the calendar year so we do see a large bookings quarter every Q1 going back over time. But this was a very good quarter. No exceptional deals in there, just keep chasing every piece of renewal business down that there is.
Yeah and it is almost all maintenance contracts.
Thank you. Our next question is from Alex Kurtz, Sterne Agee. Your line is open.
Allen Kurst – Sterne Agee
So as the 2400 gets more traction next couple of quarters here, how should we think about transaction size and gross margin profile and how that sort of impacts the rest of the product line?
We’re not indicating that we expect to see a better gross margin profile. But we’ll see. And the reason I say that is that obviously with the VIPRION 2400 there is much more opportunity to add software solutions. First of all BCMP, which is new which has got license associated with it, I mentioned in my introduction that we’re seeing a strong interest in that. So by definition there we’re going to see more software on the 2400 platform
And then the factor is performance functionality, which leads us to believe there will be more module attachments. Because that’s what we started to see last quarter. But we’re not giving any numbers out on that. We just think it’s certainly going to be a good trend.
Thank you. The next question is from Ryan Hutchinson, Lazard. Your line is open.
Ryan Hutchinson - Lazard
So I guess my question’s on Telco. Clearly you indicated strength there. I know you touched on it, John, with respect to the demand there. But maybe if you could flush that out. And with respect to Version 11 is the new opportunity starting to hit stride there? You talked about it at the analyst day; you gave us some evidence of lab trials. I think what the investment community is really trying to get their arms around is with respect to that 20% growth target and how much of that is related to mobile being a piece of that.
And really your ability to physically sit behind Evolve Pack Core or the GSN etcetera over time and then evolve the business from where you are today to potentially where you’re going. I think just any commentary across the board with respect to that strategy would be very helpful. I know it’s been asked several times over the last several calls but never really answered in a definitive way and I think that’s really what’s key to people’s understanding of why you guys grow in a lot of respects to what people believe is saturated market. Thank you.
Yeah I think we’ve always done that but maybe it’s not been so clear. First of all as data increases within the service provider networks, pure data then obviously LTE will increase that dramatically and clearly more data’s increasing it dramatically as well. As that increases our potential for optimization increases dramatically. So that is a core key driver for us.
And the other thing to think about our business is that, and I think we said this before as well, we don’t tend to be looked upon as the plumbing that’s put in as networks are being built. We do get involved in that architecture however as the data’s increasing and the complexities increasing and there’s more need to mass size that data, to monetize it, that’s when our products really come into the ruin. And clearly VIPRION, the chassis has been very, very popular there.
And then the other area is within the service provider space and maybe Karl you can call on it, like firewall has been very strong as well.
Yeah I mean one of the big benefits of the VIPRION is we’re able to consolidate a lot of features and functionality. And one of the things that we’ve been asked by a lot of the surf providers to date is enhancing our firewall capabilities. And this includes having performance, having some very fundamental things like a better rule space language and management functionality behind that. And that’s what we talked about at the analyst day. And that continues to progress.
There’s a lot of other things too. You know the other piece is iRules and we get involved a lot with helping scale various parts of their infrastructure including things such as diameter or SIP or some of the other protocols that are running there. We also get called upon to do things like traffic steering. And traffic steering is based upon content and connections. And so VIPRION’s really good at that and our infrastructure’s very good at that. And with the performance, you know, it’s just a natural thing to be placing behind either the PGW or the GGSN and their infrastructure.
You know we talked in November at the analyst meeting about the major use cases for Telco and these are just priorities for these guys. They’re delaying spending on a lot of other places, obviously investing in LPE around the world. But these use cases are priorities because it’s allowing a much more optimized use of their infrastructure to process the dramatic growth and data.
Thank you. Sanjiv Wadhwani from Stifel & Nicolaus, your line is open.
Sanjiv Wadhwani - Stifel & Nicolaus
Just curious in talking about acceleration and product growth in Q2; are you seeing that specifically in your pipelines or is this sort of really the extension of the 2400 continuing to gain more and more traction?
Well it’s (inaudible) so we expect the 2400 to gain more and more attraction. We expect version 11 to gain more and more traction as we do with verticals like security solutions as well. But that is based upon a bigger pipeline. I mentioned our pipeline is very strong at the moment. I think we’ve taken an appropriately cautious view of the cause rates and the fact of the pipeline, you know, given the potential risks in the economy. But the pipeline is extremely strong right now.
Thank you. Alex Henderson with Miller Tabak, your line is open.
Alex Henderson – Miller Tabak
I was hoping we could talk a little bit more about the security piece of your business. Obviously you’ve been making a lot of investments there and doing a lot of work in that segment. It also seems quite clear that the technology is moving up the stack from the packet layer up into the application layer where your skill sets are uniquely qualified. Can you talk a little bit about the context around application management within the virtualization layer and how that impacts, how you set those up relative to those same parameters being utilized within the context of the security management process and if there’s anyway to integrate across those two features.
So a couple different angles to that. You know one is that you’re absolutely right; the desire for security functionality is traveling up the stacks so people want more understanding of context. Not only who the user is, where they’re coming from, which application they’re accessing and what security policies are applicable for that particular application in that scenario.
I think we’re pretty uniquely positioned to be able to deliver on that. One because the number of application level decisions per second to achieve that is very, very high and that plays right into our wheel house.
And then to follow on into the virtual conversation and portion of your question; as these applications begin to travel around within people’s networks and data centers, it becomes important to have those policies follow them. And so what we’re up to is absolutely having a way for our functionality to follow this application and be paired with them so that those policies do work out. And really in terms of what we’re up to and sort of the permission that we have from our customers, they see that security portion of what we do is just a natural extension of our abilities and things that we offer them. So they’re looking for us to provide those solutions.
So sort of beginning endings in terms of having stuff traveling around and being paired up on the virtual front. But you can expect to see much more from us in that area.
Thank you. Brent Bracelin, Pacific Crest, your line is open.
Brent A. Bracelin - Pacific Crest Securities
I wanted to actually ask a follow up around VIPRION sales tripled here year-over-year. I’m trying to understand what’s driving a mixed shift to chassis versus appliance. Are customers pulling you into new application environments that need a more faster, higher throughput and box? Is it just the 1u, 2u appliances are a bit stale and when that refresh happens you expect to see a more balanced view? Help us understand what’s driving the VIPRION momentum and if there’s a bigger trend going on that can explain why that business is tripling for you versus the traditional appliance business.
Part of it is the surf provider business obviously. As they’re scaling their infrastructure that’s putting increasing demand, as John mentioned in his script for the VIPRION placement. And if we penetrate more into those accounts we’re also doing more advanced things in terms of how we may- doing- working with traffic, providing security features and functionality and other things. And so that just puts more demand on capacity.
And so I think part of it’s that. I think parts are supports fro BC&P and some are other functionalities around IOPs because we’re able to slice up their infrastructure and you know build a variety of different virtuals with big IP. And so that’s attractive because you can reduce the numbers of clients you have to put around there.
And then also just to note, our revenue grew both for the 2400 and the 4400; it wasn’t just one or the other. So that encompasses both when we talk about VIPRION. But really it’s traffic. It’s also security and other applications are getting attached and I think Telco probably.
And also, not to miss that massive price performance increase. So you know the actual price performance is dramatic as to where the 2400 sale versus the existing range of products.
Bill Choi, Janney Montgomery Scott, your line is open.
Bill Choi - Janney Montgomery Scott
Continued growth in gross margins over the past several quarters, you know, fairly impressive particularly concerning the product revenue decline. I wonder if you could kind of rank order what’s driving some of the gross margin expansion. You obviously have a virtual addition, which is going to be very high gross margins. You talk about higher attach rates with the module and form factor. I forget which quarter it was but somewhere in the past you guys talked about 30% attach rate. If you could update that and whatever else might be really moving this gross margin forward.
You really answered the question there during the question in that software attach rate is significant. There’s no question about it. And the fact that we’ve got more pair within the hardware solutions to add more software. And you mentioned VCMP, which is obviously really taking up by the customers. And then the virtual edition as well when we talked about the growth, the year-over-year growth in that. So there’s no question that there’s been a makeshift in terms of software that helped our gross margin.
Troy Jensen, Piper Jaffray, your line is open.
Troy Jensen - Piper Jaffray
Congrats on the nice quarter gentlemen. Follow up on the 2400 here. So could you talk about- I guess I’d be curious to know if lead time’s extended throughout the quarter and if you’re entering Q2 with more backlog for that product then maybe you thought?
And can you give a sense for how much of the sales of 2400 are into Telco versus the new products?
So to your question about lead times, I don’t think our lead times for any of our platforms extended during the quarter at all. And I actually don’t know the answer to the make up of the backlog but I don’t think it’s anything different than normal to highlight there.
Yeah I think the 2400 is similar to the regular product line in terms of the ability to ship it. In terms of Telco versus enterprise, I’m not sure we’ve got that data. Typically in the service provider space the 4400, the high one, has been more popular. But that’s more- I mean I don’t have the data behind that. So most of the 2400 is probably swaying towards security, swaying towards the enterprise at the moment. And that’s something we’ll maybe check for the next call.
Thank you. Jeff Kvaal, Barclays Capital, your line is open.
Jeff Kvaal - Barclays Capital
I was wondering if we could delve into visibility into a couple of the areas that we have all had some concern about given the headline. How comfortable are you feeling with your visibility and pipeline in Europe? It sounds like Telco you feel fine. But then again also in federal. Thank you.
The visibility generally we feel good about. And if you look at the sheer volume and we look at the fact of the pipeline and we look at the close rates that we are applying to that, you know that feels good to us and we don’t see any red flag there at all.
Federal of course the visibility there is not so good. But hoping it gets better as we go through the year but we did see delays in projects that we’ve already won, we know we’re going to get the business but the actual purchase order didn’t come out and federal was a little bit disappointing on that basis.
So I think it’s too early to say the visibility in federal has jumped up completely but you know I would say the decline is it was only 4% of our business and I’m not quite sure where the bail went on the federal vertical but that’s what we’re seeing.
The rest of the business we feel good. As Andy said, we always feel pretty good about our visibility on a quarterly basis with our fact of pipeline and our assumptions there and the forecasting mechanism that we’ve got with the sales force. We feel reasonable about our six-month profile in terms of the way the business is shaping up. And then it gets more cloudy as you go beyond the six months.
In other words there’s no major change really in the visibility.
Mark Sue - RBC Capital Markets, your line is open.
Mark Sue - RBC Capital Markets
If you think about the year in total, what do you think would be the biggest contributor in terms of dollar value that gets you to 30% growth this year? Is it Telco, Security and then virtualization in that order? Or is it more confidence from coming from a big upgrade from your existing core customers?
You got me smiling again. So we basically have a goal of at least 20% growth for this fiscal year. I do believe actually that version 11, the core version 11 that we’ve done with the feature sets that we’ve got there, the trends in service provider in terms of the data, the acceptance that we’re now seeing our customers in terms of being a security player, I really think they’re going to play out this year. And they certainly played out in the quarter.
So I think as we look back I think that’s what you’re going to see. You’re going to see strong 2400 with no real competition against it. I think that towards the end of the year as we refresh the low end we should see some opportunity there as well.
Thank you. Simon Leopold, Morgan Keegan, your line is open.
Simon Leopold - Morgan Keegan
I wanted to maybe follow on in terms of your growth outlook. Let’s go with the 20% or greater assumption. How much of that do you see driven by the market adjacencies? Particularly you’ve talked quite a bit about security, a little bit less about things like when optimization. But I’m trying to get my hands around how big those are in your assumptions as contributors to this growth rate.
I mean we don’t typically break out, for example, what we’ve done within the security space in the quarter. We did say that the application firewall revenues were the best ever. And we did say that we saw some good sequential growth in our access technology like APM and Edge Gateway, and they are significant. I mean they are non-trivial in terms of growth and as a percentage of the revenue that we do. But then you get into the subject of variant security. For we may be putting in a large 2400 installation to do as an application firewall that’s also doing one optimization and then also is doing application optimization. And that gets quite subjective in doing that. So that’s why we tend not to get specific numbers. But the ASN with security only type solutions, the access, you know, they’re very important.
The next question will be from Brian Modoff, Deutsche Bank, your line is open.
Brian Modoff - Deutsche Bank
Okay John so let’s try that a different way. Let’s look at security side and the ASM module, what do you think your attach rate is with your installed base? And what do you think it can be over time in terms of the adoption? What feedback have you gotten from your client base with regard to your proposal on the application layer?
I mean you know Brian you know we don’t give out the attach rates specifics of our modules. But to give you an idea, if you look at the larger account base that we’ve got and you look at the geographies, ASM has been very, very strong in Europe, it’s becoming stronger and stronger in North America. The sales force and the AFC are becoming much more security savvy. You may have seen we hired a new person in the team, Manuel Rivelo, and that’s his goal is to push that security throughout the sales force and optimize the solutions. It’s pretty critical. But we don’t give the actual attach rate.
But for certain priority for spending is going to security for a lot of these enterprise customers. And I think now more than ever our competitiveness in these different businesses has never been stronger. So feature parody or superiority is pretty clear across the board for us.
And just in closing, an obvious statement on security is that security is really becoming right to the forefront of our customers. So we’re really at the right time here in terms of the application solution that we have.
I’ll just add something to that John. This is Manny. What we’re seeing from the customer base across the board and we’ve seen a lot of examples of it this week just with the service attack and some of the breaches that have happened for the major corporations, application vulnerability is at an all time high. And all of our customers are seeing that. So the ASM module has become front and center for all of them. It’s industry-leading performance, capability, and as a result of that we’re seeing a lot of traction. It’s relatively new in the market in the sense that application firewalls are not well understood so there’s a market awareness also that’s occurring. But we’re seeing that at all major, major accounting we expect to have future success there.
Thank you. Our last question comes from Prianka Chopra with Bush Securities. Your line is open.
Prianka Chopra - Bush Securities
I wanted to ask you just quickly back to Telco. It was down sequentially and I just want to get a sense of what you saw the carriers doing or major service providers doing in the quarter.
And when you talk about pipeline, John, being strong, does that mean that Telco is sort of rebounding in the upcoming quarter?
I’m not going to be specific to that. Let me just do the pipeline. Telco is very important to our pipeline, there’s no doubt about that. And we do see some really large projects out there. But by nature given that they’re large projects you can see some lumpiness. But the pipeline as we look forward in the service pipeline we feel very good about it. We think we’re definitely making progress in terms of identifying the solutions that we really bring to the market that are very, very core to the business of Telco’s. So that’s really important.
And Roe we’ve talked in the past about for our business in particular the five that Q4 usually in the Telco space is seasonally down. So if you look at the last two Q1s for us, it was 21% and 21%. So actually the sequential down is in line with our expectations but a better quarter then we historically seen Q4.
Thank you very much. We look forward to seeing all of you at some point out on the road in the next quarter or two. And we appreciate you joining us for today’s call.
Thank you. This concludes today’s conference. Thank you for your participation. You may disconnect at this time.
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