Maria Riley – IR, The Blueshirt Group Lee Chen - Founder & CEO Greg Straughn - CFO Ray Smets - VP, Global Sales

Mark Sue - Royal Bank of Canada Capital Markets Ashwin Kesireddy - JPMorgan James Faucette - Morgan Stanley Stan Kovler - Citi Research Brent Bracelin - Pacific Crest Securities Rohit Chopra – Buckingham Research Catharine Trebnick - Dougherty & Company

Thank you all for joining us today. I am pleased to welcome you to A10 Networks third quarter 2014 financial results conference call.

This call is being recorded and webcast live and may be accessed for 90 days via the A10 Networks Web site, www.a10networks.com. Joining me today are A10's Founder & CEO, Lee Chen; A10's CFO, Greg Straughn; and A10's VP of Global Sales, Ray Smets.

Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its third quarter 2014 financial results. Additionally, A10 published a presentation along with its prepared comments for this call and supplemental trended financial statements.

You may access the press release, presentation with prepared comments, and the trended financial statements on the investor relations section of the company's Web site www.a10networks.com. During the course of today's call, management will make forward-looking statements, including statements regarding our projections for our fourth quarter operating results, our expectations for future revenue growth and the growth of our business in general.

These statements are based on current expectations and beliefs as of today, October 30, 2014. A10 disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise.

These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially. We disclaim any obligation to update these forward-looking statements as a result of future events or otherwise.

For a more detailed description of these risks and uncertainties, please refer to our 10-Q filed on August 4th. Please note that with the exception of revenue, financial measures discussed today are on a non-GAAP basis and have been adjusted to exclude certain charges.

A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and on the trended quarterly financial statements posted on the company's Web site. We will provide our current expectations for the fourth quarter of 2014 on a non-GAAP basis.

However, we will not make available a reconciliation of non-GAAP guidance measures to corresponding GAAP measures on a forward-looking basis due to high variability and low visibility with respect to the charges, which are excluded from these non-GAAP measures. Now, I would like to turn the call over to Lee for opening remarks.

Lee?

Thank you, Maria. I would like to thank you all for joining our third quarter financial results conference call.

Let me start by saying we are very disappointed with our financial results this quarter. We delivered the third quarter revenue of $43.4 million, below our initial guidance of $48 million to $50 million.

The lower top line performance coupled with a lower gross margin profile, brought our non-GAAP net loss to $8.8 million or a loss of $0.15 per share, significantly off our original guidance of $0.07 to $0.09 per shares. Our current level of growth and execution is not at the level we intend to exhibit.

We understand that investment community expects more out of A10, as do we, and we are committed to improving our execution and rebuilding your trust in A10. Let me get into third quarter dynamics that impacted our revenue.

We entered the quarter with a very strong pipeline and most of our regions delivered revenue consistent with, or above, our expectations. However, bookings and therefore revenue in North America were below our expectations primarily driven by lower North American service provider spending and longer than expected close cycles and sales cycles for select large deals in North America.

Looking into these factors in more detail, first, like many networking companies, we saw a slowdown in spending within our North America service provider customer segment. This particular set of customers tend to place large orders and is an important revenue segment for A10 given that four of our top 10 year-to-date customers are service providers in North America.

Putting this in perspective, revenue from North America service providers decreased 55% in Q3 from Q2. We expect the service provider revenue in North America and other regions to continue to fluctuate from quarter-to-quarter in the near term, but we do believe our value proposition remains strong as our ACOS platform addresses a critical part of their data center infrastructures and consolidation strategies.

For longer term opportunities, we are working with many of our large service provider customers to design products to meet the needs of their next generation network deployments. Second, the close cycle for several deals was longer than we expected and extended beyond the end of the quarter.

We define the close cycle as the time between when A10 is informed we were awarded the deal and the time the [deal] [Ph] is received and the product is either shipped or received by the customers. There were about 6 awarded deals that did not close in Q3 and these amounted to approximately $4.4 million.

To date in Q4, we have closed approximately $3.4 million of these deals. And third, we saw a lengthening sales cycle for select large enterprise deals requiring features in development, some of which are new to the market.

To help reduce our sales cycle times for these deals, we are adding engineering resources to increase the velocity at which we deliver these deal specific feature requests. Furthermore, to support large opportunities in our pipeline, we are also expanding the level of senior management engagement on deals above $1 million.

Diversifying our customer base and growing our enterprise revenue is a primary objective for A10 and where we have focused a lot of our 2014 investments. We have made a lot of progress in this initiative.

In Q3 we added over 260 new customers, most of which are enterprise customers. We also grew our enterprise revenue 29% over Q3 of 2013, and for the first nine months of 2014, it has grown 50% over the prior year period.

However, we still have a ways to go. In order to help build consistency in our top line, we need to deepen our penetration in the enterprise, continue to build our enterprise pipeline, continue our lead generation initiatives, foster technology partnerships and drive leverage out of our channels and new sales force resources.

We remain confident in our strategy, the power of our ACOS platform, the strength of our markets and our ability to succeed within our three different markets, ADC, CGN and TPS. We believe we are well-positioned in the market as we continue to see growing interest from our customers based on our superior performance, SSL insight and security features as well as our ability to integrate with other leading-edge networking and security providers.

We believe this is best highlighted by the record number of new customers we added in the quarter, which includes four new TPS customers. In total, we now serve over 3,600 end customers.

A few third quarter customer engagements I would like to highlight include: Our Thunder ADC was selected by two government agencies, including a large U.S. military department.

We were chosen because of our unique ability to process SSL encrypted data packets. Our Thunder CGN solution was chosen by an international carrier that is in the process of deploying one of the largest LTE networks in the world.

Lastly, our Thunder TPS solution was selected by two leading gaming companies in North America to help protect their network against the growing number and intensity of DDoS attacks. In both cases, we replaced an incumbent and beat several other security vendors in the bake-off.

We also won initial TPS deals in Asia and Europe. These are just a few of the many customer success stories in the quarter that demonstrate the power of our differentiated application networking platform, which we continue to innovate and enhance to meet our customers needs.

In August, we added several new security features to our Thunder ADC solution including URL bypass for SSL in an ADC that provides industry leading performance and scalability of SSL insight. We also integrated enhanced SSL offload capabilities, web application firewall enhancements and we broadened our application, access management features that centralize user authentication.

In conclusion, while we hit a speed bump and our revenue is not at the level we would like it, we continue to make progress on our initiatives by adding a record number of new customers, continuing to expand our enterprise revenue base and bringing on four new TPS customers. Our differentiated high performance product suite is gaining a lot of attention in the market and we see significant interest by customers, channel partners, and technology companies in the Thunder portfolio.

It is important that we continue to deploy our go to market resources and partnerships in order to help drive future revenue and diversify our customer base. To that end, I'm pleased to announce that earlier this month, we launched the A10 Security Alliance, an ecosystem of leading security and networking companies that are working together to help mitigate threats and automate security operations.

Our ecosystem provides validated and integrated solutions that help customers architect secure data centers and improve efficiency. Inaugural members of the A10 Security Alliance include leading companies such as RSA, Arista, FireEye, Symantec, IBM Security, Webroot and several more.

Additionally, we recently brought on a new VP of Strategic Alliances. Gunter Reiss joins us from Ericsson, and in his new role, he will oversee business development activities, including strategic alliances, technology partnerships, and OEM relationships.

We are moving forward and charging ahead and we will remain focused on improving our execution. With that, I'd like to turn the call over to Greg to review the details of our third quarter financial performance and fourth quarter guidance.

Greg?

Thank you, Lee and thank all of you for joining us today. Third quarter revenue grew 9% year-over year to $43.4 million.

Product revenue was $31.6 million, down 2% from the prior year and represented 73% of third quarter revenue. Service revenue was $11.8 million, up 56% year-over-year, representing 27% of revenue.

As a reminder, nearly all of our service revenue is from ongoing maintenance and support contracts and grows as the installed base of product grows. Deferred revenue grew 58% year-over-year and 11% sequentially, reaching $50.9 million.

As Lee mentioned, our Q3 revenue shortfall was primarily related to a reduction in North American revenue due mostly to lower service provider spending and longer than expected close cycle times. In total revenue from the United States amounted to $20.4 million representing approximately 40% of third quarter revenue as it represented approximately 47% of third quarter revenue.

This compares with $26.2 million in the second quarter and $26.6 million in the third quarter of the prior year. Outside of North America, revenue growth tracked ahead of our expectations.

Japan revenue increased 41% year-over-year and 17% sequentially representing 23% total revenue. Revenue from APAC more than doubled year-over-year representing 14% of revenue and EMEA revenue nearly tripled year-over-year and represented approximately a 11% of total revenue.

Revenue from enterprise customers was $26.3 million an approximate 4% decrease from Q2 and up approximately 29% from Q3 of 2013. Enterprise revenue represented approximately 61% for total third quarter 2014 revenue with the remaining 39% of revenue coming from service providers.

Moving beyond revenue, all further metrics discussed on this call are on a non-GAAP basis, unless expressly stated otherwise. Third quarter total gross margin was 73.6%, a decrease of 399 basis points compared to Q2 of 2014.

Services gross margin increased to 77.3% in Q3 from 75.2% in Q2, while product gross margin decreased 615 basis points to 72.2% from 78.3% in the prior quarter. Product gross margin was impacted by increased inventory reserves and write-downs mostly due to the product transition from the AX series to the Thunder series of product.

Inventory-related write-downs accounted for 320 basis points of the product gross margin reduction relative to Q2. We have begun to make changes in our inventory management and planning to help minimize these costs in the future.

Additionally, product gross margin was impacted by changes in the geographic mix of our revenue, and decreased 122 basis points as a result of the weakening yen. In order to accommodate for potential continued weakness of the yen and fluctuation in geographic mix, we are expanding the range for our expected Q4 gross margin.

We therefore expect Q4 gross margin to be in the range of 76% to 78%. We ended the quarter with staff of approximately 756, up from 740 last quarter, with the majority of the new hires in sales and marketing and R&D.

Sales and marketing expense was $23 million, compared with $22.5 million in Q2. On a percentage basis, sales and marketing expense was 52.8% of revenue, a 295 basis point increase over Q2 2014.

In Q3 R&D expense totaled $11.2 million or 25.8% of revenue, compared with $10.9 million and 24.2% in Q2. Combined G&A and litigation expense was approximately $5.6 million or 13.0% of total revenue, compared with $6.3 million or 13.9% of revenue in Q2.

As we announced in September, we resolved the IP claim by Radware and as a result, we expect our Q4 litigation expense to decrease by approximately $600,000 as compared to Q3. In total, third quarter non-GAAP operating expenses were $39.8 million or 91.6% of revenue.

Third quarter non-GAAP operating loss was $7.8 million. And our non-GAAP net loss in the third quarter was $8.8 million or $0.15 per share, compared with a net loss of $5.3 million or $0.09 per share in Q2.

Basic and diluted weighted outstanding shares for the quarter were approximately 60 million shares. GAAP net loss in the third quarter was $12.3 million or $0.21 per share.

Moving to the balance sheet, at September 30, 2014 we had $107.1 million in total cash and equivalents. During the quarter cash used for operations was $3.8 million.

We ended Q3 with $42.5 million of net accounts receivable, up from the Q2 2014 balance of $40.5 million. Average days sales outstanding were 86 days, up from 80 days in the prior quarter.

Moving on to our outlook. In order to account for some of the deal dynamics we saw in the third quarter, we are adjusting our forecasting methodology or specifically we are expanding our revenue range given the longer close cycle per select large enterprise deals and we are applying a higher level of conservatism to service provider opportunities in the pipeline given the current spending environment.

We expect fourth quarter revenue to be in the range of $41 million to $45 million. At the midpoint this represents a 2% year-over-year increasing revenue that brings our expected full year growth to between 24% and 27%.

We expect to report a non-GAAP net loss between $0.14 and $0.20 per share using approximately 61 million shares on a basic and diluted basis. With that, I would like to open up the call for your questions.

Operator?

Okay. Thank you.

And sorry for the background noise. Gentlemen, if we could get a sense of how we should think about the long-term financial model with the decrease that we saw recently.

How we should think about revenue growth over the longer term, how we should think about margins over the long-term and focus on timing of profitability? That would be helpful.

Greg, can you take this?

Sure. Mark, I think that the key thing here is that our visibility has been challenged over this last couple of quarters.

And so we really focused our attention at this point on speaking towards Q4 and making sure that we get it right both in the core of the business as well as how we guide to the participants of this call. So on a couple of the elements we've talked about Q4 and give a little color as to how we are thinking about them but for the longer term model I think we are going to have to see that develop as we go through Q4.

Clearly, to go to the last piece first, profitability does have a little bit of a push out on this just because of the lower revenue rate that we are running at currently. But from a margin perspective, I think in the script we described what the effects are on margin and most of those are things that were transitory within the quarter.

The yen, I think that will continue for some time, we are making assumptions and why we expanded that range that we will see some uncertainty in the yen at least in the short-term. But the other elements of our margin really remain unimpacted.

So I would like to be able to guide you a little bit more on the long-term model, but I think at this point, our main focus is developing credibility around our ability to forecast in the short-term before we take you too far down the long-term road.

Okay, understood. And if I look at your competitors, the largest one actually have very good results even on the service provider side, I'm just trying to get a sense of what – how do you see the competitive dynamics, what do you see the root cause of some of the delays at your carrier customers in North America?

And whether or not you feel your - the market is still – ADC is still growing in high teens? Thank you.

Ray, you want to take this?

Yes, sure. I will go ahead and take it.

Well, it's really from a service provider perspective we really should focus on North America, I think that's probably going to get mostly to your question where we saw lower North American spending than we typically would see. And we saw that some other companies have reported similar circumstances, but keeping in mind four of our top 10 year-to-date customers are service providers in North America.

And we expect the service provider revenue as a result to fluctuate from one quarter to the next. So we feel certainly very strong that our value proposition for service providers is still quite strong, our ACOS platform continues to address what those customers are looking for in terms of addressing the critical part of their data center infrastructure and consolidation strategies.

So what happened in North American service provider, it really is – it's an interesting situation to look at, we are not losing any particular deals. We are just seeing a slowdown in overall spending.

And I'm not sure I can give you a whole lot more data than that.

I think based on our internal data our win rate in this quarter approximately similar to the prior quarter.

Mark Sue, you have another question?

I think we’re good. Thank you, gentlemen and good luck.

Okay. Thank you.

Yes. Hi.

Thanks for taking my question. This is Ashwin on behalf of Rod.

I was hoping you could give us more detail on both higher inventory reserves and write-offs that impacted gross margins. I know you mentioned about the transition from AX to Thunder.

But, looking at the deal pipeline heading into the quarter, it sounds like that is something you could have already expected. Can you help us understand why there would be a surprise?

Also, if you could provide any more color on the nature of this write-off, that would be helpful too?

I think that's a – there was an acceleration in our customer deploying the Thunder versus AX. Our customers accept these Thunder model faster than we expected.

Greg, can give you more details.

I think Ashwin that does get to the core of it is that the transition to Thunder has happened pretty rapidly, we just put that into market in the first quarter of this year. And it's now over – it's up at 80% of our sales volume.

And so, the transition happened more quickly than we expected. And in Q3, obviously, a lot of the – more of the business went to Thunder than we had anticipated.

And so in the nature of trying to be – accommodate that move and allowed to continue we ended writing [down] [ph] both boxes that were AX boxes but also there is a fair amount of componentry that sits behind that, chips and cards that we have in our inventory versus in manufacturers' inventory. And so that kind of exacerbated the amount of the write-off because it was good that we’re kind of contingent – or nor contingent but consignment products out of our manufacturers locations.

And so the – what it does is, pretty much clears the deck of most of the AX product. There are a couple of pieces that are still actively selling.

But, most of the AX now is either at off the books or written down to fairly low levels.

Okay. So you gave the number of 2.2 percentage points hit on gross margins due to write downs, 1.2 percentage point hit due to weakening yen.

And so is the rest of – is the delta between your initial expectations and what you are reporting in terms of gross margins are related to this inventory reserves? Or are there other factors there?

I think the other factors that are called out here have to do with the – so we got the 320 basis points, we got the 122, the geographic mix, with the [Inaudible] in North America which is typically a strong gross margin market for us that had an effect. Now, the other fact is that just because our level of gross margin, our level of revenue in the quarter, there is just less total revenues to spread some of the fixed costs across both the staffing and the support organization the warehousing staff and so that has an impact on the gross margin as well, just kind of the volume impact.

Okay. I just have one more question.

I was hoping you could give us more perspective on the sale cycle, lengthening, were the sale cycle longer than your expectations because it was new customers you are dealing with, with whom you have relatively less experience with or is it real slippage in the deals. Also what is the number of service provider deals of the fixed deals that got slipped?

Well, Ahswin, I will go ahead and take this one. Maybe worth expanding this a little bit from the discussion that Mark had just a few moments ago.

Obviously, service provider in North America is a larger impact to us because that's where we see a whole lot of larger deals get done. We didn't necessarily see sales cycle increase on service provider, we just saw an actual slowdown in overall service provider spending.

But if moving beyond service providers, which I think may get to your questions, some of the large enterprise deal slipped due to longer than expected close cycle and sales cycles. And Lee commented on both of those in the earnings discussion, but on the close cycle side, some of this is just being a new vendor where the deals that we were awarded are just delayed mostly due to more administrative related issues.

As Lee mentioned we closed about 75% of those deals that were delayed since the end of last quarter. So that's a little bit on the close cycle.

But, on the sales cycle side, we also saw a lengthening of that cycle, for some select large deals requiring special feature developments some of which were new to the market. But also some features that we may have to implement in order to close the deal in some new or different way.

So I can give you some examples of what those are like to give you a kind of an idea of what impacts the sales cycle. So for example, one customer with a large CGN deployment was suffering from DDoS attacks in their DNS environment, they asked us to come to the table with the DDoS protection solution on their CGN deployment and we developed it.

And that caused them to refresh their entire infrastructure. But, the time it takes to close that deal actually was increased – to sell that deal actually increased.

Another area that we see is due to the Snowden effect. We are seeing multiple requests from customers for new sets of special SSL ciphers to further protect their customer traffic over SSL.

And we’ve developed that. But, that development process takes some time.

In the enterprise space which has been a bit of an impact for us in Q3, the large enterprises require a very special features such as to automate configuration and provisioning of the ADC services across kind of multiple business groups within large enterprises and we have to develop that and we developed that. And also many large enterprises are asking for special load balancing features where enterprise customers just want to better manage load balancing across their desktop or virtual desktop infrastructure in our case.

So some of these things really aren’t very new to us honestly A10 is built on this whole concept of customer driven innovation and as we continue to move deeper into the enterprise and penetrate that Fortune 1000 which we are aggressively pursuing naturally the numbers get bigger and as a result we are going to have to bolster some resources in our engineering team to better support these kinds of requirements. So it’s those kinds of things that are actually impacting the sales cycles and from a close cycle perspective, it's just being the new guy at the table.

Okay, understood. Thanks very much.

Thank you very much. I wanted to touch on couple of things related to sales cycle.

First, can you talk a little bit about the timing when you are starting to see some delays in sales cycle as well as (indiscernible). And then I guess the question from arises because even if it sounds like if you are going to close the delay deals within the quarter you still would have kind of bend towards the lower end of your guidance range and that's being taken into account better than expected revenue and just try to understand why when we start to see that in the impact there, first.

Then second, I wanted to know your take on – going back to Mark's question on competition in the market, are you – I know that your run rate haven’t changed, are you seeing anybody more or pricing dynamics changing at all that may also be contributing to people taking a little bit longer to go through their evaluation cycles? Thanks.

So I guess I will take that one. Greg may have some comments on the sales cycle.

When did we actually see the changes in the quarterly activity that leads us to that? It's essentially from a linearity perspective a good portion of our business as you would expect in business of our type tend to close later in the quarter.

And in Q3 in particular, we had a particularly later quarter than usual in month three. So the signals were probably only a few weeks before the end of the quarter because obviously what those end of cycles look like especially in the enterprise domain.

So and we do keep track of that on a daily basis we look at this data almost on a continual basis. Your second question was regarding competitive pressure, from a competitive perspective, we do see all of the competitors in pretty much all of the deals.

But, we haven't seen any thing additional or different from a competitive pressure perspective such as higher discounting or anything like that in North America. So we continue to see the same competitors in the same kind of deals, we are not seeing anything different.

Okay. And then I just had a question on inventory, you said you would bring down most of the value of the inventory et cetera.

The question is, are those products still going to be available to customers and as a result if and when they do sell through on a non-GAAP basis, should we expect that them to be more accretive or just trying to think through what's happening with those products and how they come back into the P&L or something?

Yes. The products that we wrote down several of them do still have application in the market, a lot of it for existing customers who have installed base of that unit and may want some additional units going forward.

Some of them would get used as replacing units relative to units that happen to fail on the field and those will come through in the service area. And some of these boxes we are working on repurposing some different fashions, but they are not going to be the mainline products that we are aggressively promoting at this point.

Okay, great. Thanks.

Hi. It's actually Stan Kovler calling in for Ehud.

I just wanted to ask a question, another clarification about the deals that amounted to the $4.4 million? And then its related to the guidance, obviously, if you add back the deals to Q3, let me think about Q4 then there is a decline or you can spread them across both quarters, it's flat.

But, you only added about 25 people for the organization this quarter probably in an attempt to control cost, how do you think about the drivers of sales for the following quarter and for the following year from that quarter carrying sales person perspective, is it partnerships, is it sales, how do we think about the path to growing revenue from here? That's the first question.

And the second question is really just a clarification, where there any 10% customers in the quarter and how did you fair with one of your largest enterprise customers that was previously a 10% customer?

There is a lot of questions embedded in there. So I'm going to try to get to the once that I can recall.

And if I miss anything just feel free to cycle back on it. Just – the easiest one to answer actually is on the head count one and the staff growth.

Just because of the number you see for Q2 includes our summer intern program. And so there were roughly 16 individuals who are summer interns who in that number who just located off.

And so there is an additional 16 people who are hired during the period related to that. And the people who were hired, tended to be in our engineering team on balance and in the sales and marketing team.

So the head count growth was actually slightly greater than might be immediately visible from those numbers. But, from an investment perspective we are putting additional feet on the street from a sales deployment as well as through our channel program.

I will let Ray talk about channels in a second and how that goes through. But from a growth perspective, we are still continuing to selectively determine where people go and we actually were not attempting to cut cost this quarter.

We were still charging ahead with the expectations until very late in the quarter as Ray had indicated that we were going to be well within our guidance range.

So yes, let me talk a little bit about some of the things that we are going to do going forward to make sure that full productivity is there as we drive through Q4 and then 2015. And Lee kind of highlighted this in his opening remarks.

But, one thing we are going to do is, we are going to continue to look for ways to deepen our penetration in enterprise and build the enterprise pipeline. And we are going to do this by investing and developing more channel lead opportunities as partners that can get us into the enterprise.

We've already been doing this during the course of the year, but we were really just beginning to steamroll that. So this is part of our A10 Affinity Program which we launched couple of quarters ago.

And that's where most of our effort is being placed to enable ADC sales in enterprise. So far the program is delivering the kind of momentum we like to see in this kind of a program in the early days and we were prepared to take what we learned in North America and rolled that out globally.

So that's one aspect. But from that we will continue to develop lead generation initiatives where we create demand and we deliver those leads from that demand in various programs into our inside sales organization.

And we are actually hitting our internal goals in terms of leads generated in 2014, so we are pretty happy with that initiative. We recently hired new leadership to drive inside sales activities in North America and we are taking what we learned there to a more global approach as well.

So that's the second part of it. Now, Lee talked a little bit about fostering technology partnerships and that's certainly is key as well.

We have about 30 technical partners – technology partners that we itemize on our Web site and we are fostering new partnerships every quarter. And as Lee mentioned we hired Gunter Reiss to lead this initiative.

He is a seasoned Alliance executive that will be focused on building and leveraging our technology partnerships. So but, just to kind of round that out.

We are going to leverage our channel, but we are also developing these sales into field resources. So as I mentioned, our progress with A10 Affinity Channel Program is moving forward just nicely.

With total number of partners in the program are up meaningfully quarter-over-quarter. We have seen a strong up tick in our channel enablement training activities that are online and available to all of our partners globally.

The number of deals that we are seeing in the channel are up on a year-over-year basis and we have seen a very strong increase in deal registrations. So overall, we are pretty happy with the progress that we made on the A10 Affinity Program.

And we are very bullish that as we rolled this program out globally that will help us expand access to the market now we just need to close the sale.

Thanks. That's helpful.

And then just any 10% customers on the quarter?

No. Not this quarter.

And if I can just ask a final question on Japan, what drove the sequential increase in Japan was it the enterprise business or the majority is still service provider that came back a little bit?

I think revenue from Japan is still primary for the service provider customers -- the revenue from Japan this quarter is higher than what we expected. But, still below our typical run rate.

And not at the level we would like to be. Ray, you want to add something to it?

I think you covered it. We do have – we depend very heavily on service provider revenue in Japan.

We are very much overweighed on that. And as Lee mentioned we did have a better than expected quarter there.

And just an insight on that is that at the end of the prior quarter, we talked about some service provider deals that's going out of the quarter and some of what you see in Japan are those deals actually closing and coming to fruition.

Thank you.

Thank you. I will ask a couple of questions if I could here.

Starting with Ray, I want to go back to service provider given you had the unexpected weakness in Japan, last quarter you saw unexpected weakness in North America, this quarter, I think Juniper last week talked about slowdown in their service provider business and really not expecting a rebound until the second half of next year. Could you just provide a little color around what you are seeing, the appetite to invest relative to service provider customers?

And would you be in the camp of Juniper, where you don't expect much of a rebound until the second half of next year or what's your best guess of when spending starts to improve?

Yes. That's a great question.

Obviously, we are part of a bigger market. So we are not alone on this one.

And I'm not sure I can actually give you as much as I know the service provider market, I can't give you a real prediction as to when we are going to see investments come back. But, as you know, service providers tend to move in a herd on mentality that's what I have seen in the many years I have been doing this.

And we saw – the activities in Japan probably for other reasons than what we are seeing in North America, in Japan last quarter, we thought it was attributed to – we heard many analysts talk about maybe it was attribute to the overall economics situation in Japan. In North America, we've heard stories around whether there is a cash preservation activity regarding some new wireless licensing strategy or deployment will happen in the next year.

So it's very hard of us to put our finger on it. The issue for us is that where we exist within the service provider architecture is truly key where they derive most of their revenue in terms of services and applications touch the kind of solutions that we deployed.

So we feel like we are in a fairly protected area of their architecture. And we know that the technology will not be eradicated.

If anything it will be consolidated and enhanced. So we think from a longer term perspective, service provider spending will come back.

But, the reality is the opportunities in the pipeline are lower than we would normally expect and we are hearing that from other companies as well.

Okay. So it sounds like visibility if anything is kind of declining in that certifier area versus kind of the last two quarter, which truly have been tough.

Greg, my follow-up question is really for you around enterprise, if we think about kind of your outlook here and guidance for the December quarter. I know you are not breaking out guide on enterprise in certifier basis.

But, if I look at the kind of spill over enterprise deals that you've already closed this quarter and then look at the guide, it does look like you also expect in the implied enterprise business to be weak as well. Could you talk a little bit about the pipeline that you see in the enterprise in the December quarter, given typically this is a quarter that you would expect some seasonality in enterprise budget plus?

Right. So actually there is two slightly conflicting trends here.

One is that, our enterprise pipeline is actually very strong and we spoke in the deals under $500,000 where we see fairly consistent growth in that part of the business and much more predictable part of the growth, but also in the select larger transactions that Ray had talked about earlier. So I think what we have seen is, we have seen a growth in pipeline.

We are seeing a good traction developing there. But, because of the things that we have described on these larger transactions may become somewhat less predictable as to what they have closed dates are going to be as we work with them to develop these customized features that are very specific to them.

And so from a guidance perspective – from a forecasting perspective there is a little more uncertainty around the timing of their close. So those – that's kind of push pull that we got.

It's not about interest in enterprise. It's not about your interaction, it’s about our ability to forecast the close date that is causing this to be – and to put the guidance where we had to have the broader range on the guidance, so that we can accommodate both the ins and outs of these customers.

Perfect that's helpful color Greg. Thank you.

Thanks very much. I wanted to ask a clarification question on the inventory, did the Radware litigation have any impact or did that force any write offs as part of any settlement or IP settlement.

Those are clarification, then I had a follow-up question.

No. There is absolutely no impact from the Radware settlement at all.

Okay. And then I wanted to come back to the sales cycle again and maybe just talk about security, but did any new features or security capabilities with the new product, new line extend the sales cycles or maybe extend e-mail periods, and then I know Lee only talked about 4 new TPS customer, so maybe as you talk about that just talk about the momentum in security as well?

I think most of the enterprise feature requests were based really on automation. How do you make the enterprise manage their network easier across different department?

So what the – there is also a lot of increase we saw SSL inside, many are feature request to extend our market leading SSL inside could have been – fine example, I think what Ray mentioned about – is to read about cipher, the different algorithm for the security, their encrypted data. So that's one area, in terms of the other – I think the other security features, I think really not about the security features, but it's really about since we are deepening penetration in enterprise, the number of customer request just flowing more than what we anticipated because of success we had by getting the enterprise talking to us and engage with us for the feature can be more than what we expected so to address an issue now we are adding more engineers for it, now to really fulfill the feature request, so we can show them the sales cycle.

There is more feature request from the customer rather than the customer evaluating some of the new features on the Thunder series that may have extended the sales cycle is that…

It's a feature request. That's also the feature request on customer who are really interested in the product like our performance, really like a SSL, really like our other security features, our existing features.

But they just want – mostly are really about management, how they automate, how they do – how to assess management cost more devices.

Thanks Lee.

Thanks.

Oh, thank you. Can you hear me?

Yes. Fine Catherine.

Catherine?

Yes. Can you hear me?

Yes.

Yes.

Okay, sorry. I thought I was on mute but not on mute.

Okay, I have a question, can we just go back, you just said on the win rate for the carriers, can you talk about your win rate in the enterprise and give us some color on that? Thanks.

Hi, Catherine. This is Greg.

Yes.

There may have been mistake, I don't think – we don't describe the win rate by type of markets. So the win rate that we referred to as a cross multi-enterprise and service provider.

And being consistent this quarter still in the north of 70% range, but as we don't differentiate it between the two types of customers.

Oh, okay. Thanks.

I thought perhaps you did. And then the other question is, on the enterprise, it seems that how long as this new sales program have been in place to go after and increase your revenue and your number of leads?

Because it seems to me, is it – do you think that's taking longer, is that one of the reasons you ran into this challenging issue this quarter than you expect?

Hey, Catherine, this is Ray. We put the – we actually rolled the Affinity Channel Program out actually just two quarters ago.

So we are kind of still early days. So it is true, we are still in the early stages of this.

And it does take some time to actually create that momentum. But, I believe that the objectives of that program are actually working out pretty well for us.

As Greg mentioned the – our typical kind of sub-500k business is actually moving ahead which is where we see a lot of those ideas come from. But at the same time we actually see a few large deals come from there as well.

It's just the general slowdown in service provider spending that's impacting us. And then the sales cycle lengthening on the larger enterprise deals in the pipe.

So it's not really affected by that program.

Okay. Thank you.

Actually this is Greg. For Stan I want to clarify one statement earlier, I said we had no 10% in customers; we actually do have a 10% partner, a 13% reseller, so just for completeness.

Yes. Thank you all our shareholders for joining us today and for your support.

And thank you and good day.