Beyond The #’s: F5 Networks Fiscal Q2 2011 Recap

The most relevant business, technology and market takeaways from F5’s earnings:

Business Angle

• Growth Driver…Product revenue +34% y/y, App Delivery Controller (ADC) continues to be fundamental driver of overall growth
• Cautious on Japan…Revevenue growth driven by strong americas and apac performance, EMEA was below internal plan, Japan down sequentially, remain cautious on Japan in near-term
• Normal Discounting Levels…Nothing different this quarter, discounting in line w/historical levels, deal by deal it was business as usual, linearity very consistent with March quarter a year ago
• Business Outlook…Encouraged by continued momentum in key driver, very confident about prospects for the second half of the year, but cautious in near term due to uncertainty about Japan
• On Market Opportunity…“Don’t see saturation anywhere within customer base, think it is the opposite”
• On hiring…Challenge right now is hiring, especially in development

Technology Angle

• Application Modules…>30% of sales last qtr heavily influenced by application modules, nearly all of these modules derived from M&A over last few years
• New Products…Mid-range Victoria platform to ship this coming quarter but on TMOS version 10, new TMOS v11 will ship next quarter
• Riding VMware…Historically more than half of business has been influenced by virtualization/VMware, Microsoft also very strong, Oracle also had great pull through qtr as well
• Still Trying To Make ARX Work…ARX revenue flat sequentially, ARX virtual addition intro’ed in Q2, also intro’ed ARX CloudExtender, two new platforms coming in the next 6 mos to improve price/performance story

Market Angle

• Telco customer delays amidst LTE deployment…Telco revenue declined sequentially in US as providers build out LTE networks, expecting business benefit to accrue to them over time, feel strongly this is a big opportunity for F5
• Strong Cloud Momentum…Sales growth to cloud infrastructure providers was up “triple digits year over year”, also Managed service provider penetration as a sell thru business was up significantly, acting as a very efficient channel
• Federal Visibility…Very good quarter this quarter, have been investing in federal, very good visibility on projects and wins, some of the risk reduced from budget exposure b/c selling into programs run by large SI’s

Beyond The #’s: EMC Q1 2011 Earnings

The most relevant business, technology and product takeaways from EMC earnings:

• Big high-end growth driven by FAST-VP…high-end storage +25% y/y, driven by pent-up demand for FAST-VP tiering software, saw steep increase in sale of FAST-VP licenses, drove new vMax systems sales and upgrades
• Mid-tier pause ahead of VNX…mid-tier revs +20% y/y in qtr, saw some pause ahead of late-Feb VNX launch, VNXe starting shipping 2nd week of march, “VNX very well received by market”, VNX sales out of the gate larger than prior generation systems, VNX >50% of traditional mid-tier storage orders booked in last 2 weeks of qtr, >50% of VNX systems went out with flash capability, streamlined 25 different sw products into 5 suites…now much simpler to buy, dramatic increase in software penetration as result,
• Mid-tier positioning…VNX essentially replaces Clariion and Celerra, expect VNX growth to accelerate, in Q2 will be well over 50% of mid-tier growth, expect bounce back in total growth in mid-tier in Q2 with full qtr of VNX
• Accelerating VCE investments…Expanding pipeline, headcount approaching 1000, given momentum accelerating investment in VCE
• Isilon Ahead of Plan…Isilon #’s exceeded expectations in first qtr w/EMC…more confident than when they bought it that they hit $1b run rate (Isilon + Atmos) by Q312
  
• Dell erosion continues…Dell partnership declined to <$40m in revs in Q1, continue to invest in other channels to offset this divorce
• More Confident Spending Outlook…now more confident they can meet or exceed prior 2011 goals given product and market positioning, still overall expect IT spend +5-7% y/y, most probably in high-end of this range
• Documentum and RSA inconsistent…outside of storage and VMware the non-core unit performance continues to be inconsistent, Content Mgmt -10% y/y, RSA impacted by cyber-attacks
• Use of cash…primary focus is buybacks and “smart acquisitions”, see a lot of opportunity for more “smart acquisitions”, will continue “string of pearls approach”
• EMC World…”will launch many new products that will extend IT technology stack”

Beyond The #’s: VMware Q1 2011 Earnings

The most relevant business, product and technology takeaways from VMware earnings:

• Very strong quarter…driven by ELA’s (22% of Q1 bookings), including 5 deals of $10m or more, and strong international demand
  • “have disproportionately invested in international geographies over the last few years”
• “Virtualization is mainstream within datacenters”…customers moving along virtualization journey to more mission critical apps
• Service provider domination…>3500 partners in service provider program (VSPP), providing hosted IT services based on VMware
  • Softbank joined vCloud service provider program, standardizing cloud offering on VMware, other major participants now include Colt, Verizon, Terremark, Singtel, BlueLock, CSC
• On Mozy…strategy here still not 100% clear to me, VMware will continue to run Mozy service on behalf of EMC, little revs or operating margin impact in Q2 or 2011, revs from EMC will be an offset to the cost of running the business
• On hiring…see much opportunity right now, expanding operating margin at this point is “fundamentally the wrong approach”…”will continue to hire at a brisk pace thru 2011 to take advantage of opportunity”
• On Cloud Foundry…called it open source PaaS, actively broadens programming framework support and promotes portability across clouds
  • Strategy is “first and foremost about appealing to developers”, if they can get developers support it will open up opportunities to sell infrastructure, data fabrics and management products down the lin
  • 2011 about building momentum in developer space, hope this pays off in 2012 and beyond
  • >13k developers requested to join trial service since launch
  • VMforce will be an instantiation of CloudFoundry, encouraging everyone else that would like to build on this to do so
• Beyond vSphere…vSphere still dominant product, will continue to be for forseeable future, trying to encourage customers to adopt the other 3…vShield, vCloud Director, vCenter Operations…encouraging the sales force here as well

Beyond The #’s: Riverbed’s Q1 2011 Earnings

The most relevant business, product and technology takeaways from Riverbed’s earnings call:

• Strong product sales growth…+50% y/y during seasonally softer qtr, quarter was more back-end loaded than expected, feel good about how they exited qtr and funnel into Q2, Steelhead 92% of revs, datacenter appliances fastest growth category
• New software release…RIO v6.5 intro’ed in qtr, includes deep packet inspection and Microsoft Outlook Anywhere, enhanced support for Citrix XenDesktop, also supports Microsoft and VMware VDI
• TAM expansion…now compete in 3 different TAMs w/Steelhed, Whitewater & Cascade, at different maturity levels and phases of development across eacg, all three products have similar gross margins
• On competition…cisco still dominant competitor in the field, hold 17% market share advantage, big drop-off after that to blue coat and citrix, see Silver Peak maybe 20 times per qtr and end up winning a majority of the time
• Service provider differentiation…feel like they have far more application fluency and performance improvement than most competitors, the ability to scale and handle larger deployments is what separates them from competitors
  • One large Service Provider customer…3/4th’s of managed WAN optimization services deployed were Riverbed, offer multiple options to customers and they were choosing Riverbed 75% of time
  • SI’s and Service providers in aggregate make up 1/3rd of business in any given quarter
• Cloud adoption…everyone interested in it, everyone touching toe to water, need some initial deployments that are successful and reference-able, “the truth is we have been selling private cloud deployment for 6 years already”, public cloud is next step, won’t be huge in 2011, by 2015 it will be gigantic
• Whitewater…slightly higher ASP than Steelhead, similar margin profile, positioned to be lead product as customers move into cloud with backup/archive storage, early days, handful of customers, couple dozen sales in Q1, decent pipeline for the rest of the year, won’t be giant revenue producer in 2011, good halo effect on the rest of the company, attractive to SMB (especially early versions), future versions will be larger and more robust
  • Go-to-market strategy…most important factor tied to adoption is the “macro wind of cloud storage”, as demand matures Riverbed is positioned through cloud storage service providers to enjoy the benefits
• Cascade…just getting started, very small penetration into existing customer base, outpaced Steelhead growth in qtr (ex-Cace the Steelhead business still grew >40% y/y), v9.0 release in qtr, fine grained traffic classification, including advanced Layer 7 awareness, “think this network performance management solution is the best technology the market”, Cace acquisition was finishing touch to Cascade product line, something they needed to make this a full product