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

Ittai Kidron - Oppenheimer Mark Stevens - RBC Capital Market Rod Hall - JP Morgan Brent Bracelin - Pacific Crest Securities Jim Foster - Morgan Stanley Rohit Chopra - Buckingham Research Catharine Trebnick - Dougherty Mark Kelleher - D.A. Davidson.

Good day and welcome to this A10 Networks' Second Quarter Financial Results Conference Call. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Today's conference is being recorded. At this time I would like to turn the call over to Maria Riley Investor Relations. Please go ahead, ma'am..

Thank you all for joining us today. I am pleased to welcome you to A10 Networks’ second quarter 2015 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 and CEO, Lee Chen; A10’s CFO, Greg Straughn; and our 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 second quarter 2015 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 trended financial statements on the Investor Relations section of the company’s Web site at a10networks.com.

During the course of today’s call, management will make forward-looking statements, including statements regarding our projections for our third quarter operating results, our expectations for future revenue growth, profitability and operating margins, expectations of customer buying patterns and the growth of our business generally.

These statements are based on current expectations and beliefs as of today, July 30, 2015. 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 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 most recent 10-Q filed on May 06. 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 third quarter of 2015 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 the non-GAAP measures.

Before I turn the call over to Lee, I’d like to announce that management will attend the Pacific Crest Annual Global Technology Leadership Forum in Vail on August 10th, the Oppenheimer Annual Technology, Internet, & Communications Conference in Boston on August 12th, and the Jefferies Semiconductors, Hardware & Communications Infrastructure Summit on August 25th in Chicago.

We hope to see many of you there. Now I would like to turn the call over to Lee for his opening remarks..

Thank you, Maria. I would like to thank you all for joining our second quarter 2015 financial results conference call. We delivered a strong second quarter with good execution and growing momentum as the investments we made last year in our channel, field activities and product development are taking hold.

We achieved record revenue of $47.5 million, above our guidance of $44 million to $47 million and up 5% year-over-year and 8% from Q1. We also continued to drive leverage through our operating structure, resulting in a 42% sequential improvement in our bottom line.

From a demand perspective, we added 200 new customers, delivered record enterprise revenue, grew product revenue 9% over Q1 and won a multi-million dollar order from a current service provider customer in North America as they continued to enhance their CGN infrastructure.

We also saw continued strength for our security-focused solutions including our Thunder TPS DDoS mitigation solution and our ADC with advanced security features. Our pipeline of channel initiated deals continues to grow and we are encouraged by the continued progress we see from the channel investments we made last year.

In addition, we have started to roll out our Affinity channel program globally and we believe we are on track to have it launched in our key international markets by year-end. Bookings in the quarter were strong and we ended the quarter with a backlog of approximately $5 million, which is more than 50% above our 2014 average.

Cybersecurity, network resources and services management are growing priorities for our customers and for A10. Customers at the high-end of the market want products that are rich in features, fast performing and in a small form factor, which are key attributes of our Thunder products that are based on our flexible and scalable ACOS platform.

This is why some of the most demanding enterprise and service provider customers already trust A10 with their networking and security needs.

We believe that with our strong product portfolio and the strategic value we bring with our continued innovations and superior technical support, we are well positioned to grow within the high-end of the market, especially as the security threat to business is on the rise.

As we mentioned last quarter, we are seeing growing demand for ADC with advanced security features such as web application firewall and SSL insight. Gartner estimates that less than 20% of organizations with a security device are currently inspecting encrypted traffic.

This creates a security blind spot where malware and hackers can enter a network through uninspected encrypted traffic. While firewalls and dedicated security devices provide in-depth inspection and analysis of network traffic, they are not designed to decrypt SSL traffic at high speeds.

Our Thunder ADC equipped with SSL security hardware offers a powerful and scalable decryption solution to enable policy enforcement and redundancy as well as load balancing security devices.

The initial launch of our Thunder ADC with SSL Insight solution has been very successful, is attracting attention among both customers and partners and is helping driving growth in our pipeline. In particular, we are gaining traction within the government, higher education, and financial services verticals with our SSL Insight capabilities.

Additionally our Thunder TPS DDoS mitigation security solutions continues to build momentum. Our Q2 TPS growth was driven by both new customers and follow-on orders from existing customers. Also as I look to A10 to protect more of their networks from high volume and sophisticated DDoS attacks.

For the first six months of 2015 TPS product revenue has contributed approximately 10% of total product revenue. We continue to strengthen our product portfolio and bring added flexibility and functionality to our customers.

In the second quarter we enhanced our Thunder TPS and ADC platforms with the release of aGalaxy centralized management system that leverages the fully programmable policy engine in ACOS. Our aGalaxy provides strong configuration management, reporting and real-time traffic analysis.

We also launched new mid-range and high-end thunder ADC models with dedicated hardware for SSL performance and DDoS protection, providing up to 2 to 3 times better performance than the prior generation. We partnered with ThreatStop to create the A10 Threat Intelligence Service.

This add-on subscription service is now available on both our thunder ADC and TPS products. And we added our virtual ADC to the Microsoft Azure marketplace, enabling enterprises to outsource their data center operations with A10 networks.

Additionally, as we announced yesterday, our vThunder ADC was selected by KDDI as the preferred ADC for its corporate cloud infrastructure, KDDI cloud platform service.

Customer driven innovation has been a cornerstone of the A10 vision from our inception and we intend to continue to invest responsibly to bring new functionality, features, products and superior technical support to market including a hardware refresh throughout 2016. Overall, I’m pleased with our business momentum.

We delivered a solid second quarter and are seeing the benefits from the significant investments we made last year in our channel, field activities and product development, which are all driving our growing pipeline.

So with that I would like to turn the call over to Greg to review the details of our second quarter financial performance and third quarter guidance.

Greg?.

Thank you, Lee and thank all of you for joining us today. Second quarter revenue grew to $47.5 million, up 5% compared with $45.1 million in the prior year.

Generally, our deferred revenue primarily consists of customer maintenance and support contracts, but this quarter it included a larger than usual product element and increased 43% year-over-year and 10% sequentially to reach a record $65.8 million.

Second quarter product revenue totaled $33.3 million, representing 70% of total revenue, compared with $34.1 million or 76% of total revenue in the prior year second quarter. Service revenue was $14.2 million, accounting for 30% of total revenue, compared with $11 million or 24% in the second quarter of 2014.

Second quarter revenue from the United States grew 20% sequentially and 5% year-over-year to reach $27.4 million, representing approximately 58% of total revenue. Second quarter revenue from Japan was $6.6 million, or 14% of total revenue, compared with $8.5 million or 19% of total revenue in the same quarter of the prior year.

EMEA generated record revenue of $6.8 million, a 74% year-over-year increase versus second quarter of 2014 and representing 14% of total revenue. Revenue from APAC excluding Japan was $5.5 million, up 27% year-over-year, when compared with $4.4 million in the same quarter of the prior year.

Our enterprise and service provider revenue split this quarter was 58% and 42% of total revenue, respectively. We generated record enterprise revenue of $27.5 million, representing a 10% increase from the prior quarter.

Service provider revenue came in at $20 million, compared with $19 million in the prior quarter and $17.7 million in the second quarter of 2014. As Lee mentioned, we secured a large win with an existing service provider customer, helping out our single greater than 10% customer in the quarter, contributing a total of 14% of Q2 revenue.

As we move beyond revenue, all further metrics discussed on this call are non-GAAP basis, unless expressly stated otherwise. We delivered a second quarter total gross margin of 76.3% within our expected guidance range of 76% to 78%.

On a constant currency basis versus Q2 of 2014, gross margin was impacted by a 40 basis point decrease year-over-year due to changes in the yen-to-dollar conversion rate.

Product gross margin was 76.4% in Q2 of '15, compared with 77.0% in the prior quarter and 78.3% in the second quarter of 2014, with the major portion of this decrease related to shifts in our geographic mix. Our services gross margin came in at 76.1%, up 63 basis points over Q1 of '15 and represents a 98 basis point improvement over Q2 of 2014.

We ended the quarter with a staff of 800, up from 761 at the end of Q1, with most of the 39 additions in sales and marketing and R&D. In Q2 Sales and marketing expense was $23.1 million, compared with $22.5 million in Q1 of 2015. On a percentage basis, sales and marketing expense decreased to 48.6% of revenue, compared with 51% in the prior quarter.

In Q2 R&D expense totaled $12.4 million or 26.1% of revenue, compared with $12.7 million or 28.9% of revenue in the prior quarter. Second quarter combined G&A and litigation expense was approximately $5.5 million or 11.6% of revenue, compared with $7.5 million or 17% of revenue in Q1.

The decrease is primarily related to lower bad debt expense, reversal of a reserve for certain sales tax matters and reduced professional services fees. In total, second quarter non-GAAP operating expenses were $41million. Second quarter non-GAAP operating loss was $4.7 million, compared with $8.9 in the first quarter.

Our non-GAAP net loss in the second quarter was $5.3 million or $0.09 per share, ahead of our guided range of $0.14 to $0.18 per share. Q2’s net loss represents a 42% sequential improvement, compared with a net loss of $9.1 million or $0.15 per share in Q1.

Basic and diluted weighted outstanding shares for the quarter were approximately 61.9 million shares. Moving to the balance sheet, at June 30, 2015 we had $96.2 million in total cash and equivalents.

During the quarter, cash generated from operations was $9 million, reflecting strong billings and collections activities and expense management in the quarter. Although cash flow was strong in Q2 we do not necessarily expect to remain cash flow positive in the near-term. Looking into Q3, we expect to use up to $3 million in cash for operations.

Additionally, inventory levels were reduced for the second consecutive quarter as we continue to refine our supply chain operations. We ended Q2 with $46.2 million of net accounts receivable, compared with the Q1 balance of $52.8 million. Average day sales outstanding declined to 95 days compared with 110 days in the prior quarter.

Moving on to our outlook. To establish our Q3 guidance as Lee mentioned we’re entering the quarter with the very strong backlog and approximately $5 million which is above our normal rate.

Now in our strong backlog with the appropriate conservatives and the service provider vertical we expect third quarter revenue to be in the range of $48 million to $52 million. Further we expect gross margin to be in the 75% to 77% range, expect reflecting expected continued currency headwinds and investments in our professional services.

We expect operating expenses in Q3 to be between $43 million and $44 million and therefore expect to report a non-GAAP net loss between $0.08 and $0.12 per share using approximately 62.8 million shares on a basic and diluted basis. In second desk we’re assuming the yen exchange rate remains in the range of 122 to 124.

With that I would like to open the call up for your questions.

Operator?.

Thank you. [Operator Instructions]. We’ll go first to Ittai Kidron with Oppenheimer..

Nice to see business getting back in to motion.

Greg if you breakdown the financial performance here, I mean clearly it is better than targets but is there one specific area where you think you really got surprise to the upside, you gone through all the details but I'll be great to know where if you really did better than what you thought you will do, whether it be a region or product category?.

We think on the revenue side most of things we saw were within the range of what we had expected and had set guidance for. So that was pretty much as expected. I think we were and we saw strength across the geographies as we had expected.

So the drivers of the EPS and the cash fees have to deal with management at expense side of business and a pretty intense focus on collections activity. I think that’s what helping us to dial on those two metrics..

And then regarding the deferred revenue jump. Is this related to the one large service provider that you had in the quarter? I'm just trying to understand if when you look into next question you also assume a one large customer. This kind of one of those things that you kind of tripped on in the past we had some big customers that went away.

I'm just trying to think about; while it's good to have big customers come along when you have few of them how do you maneuver through that smoothly?.

So couple of things, one is that the large customers that Lee had referred to that was the CGN win. That is not -- other than the maintenance and support for that deal that’s not what's impacting deferred revenue, deferred revenue is a different from product that is from a different customer.

So those two items are not directly related but I think on the large customer question, you're right, that’s one of the factors that we're continue to deal with and having this customer in the quarter was a very good thing and with the backlog that we build was we feel create a good platform for going forward..

Ittai I think we feel comfortable with our Q3 guidance. We are also entering in Q3 with strong backlog. Our guidance has really using the same methodology as we used in the past couple of quarters and we really consider all the pipeline applying by appropriate conservatives and for large deals..

That large deal was that -- can you comment if that was TPS or ADC?.

As Lee said it was CGNs, so ADC related..

And we'll go next to Mark Stevens with RBC Capital Market..

Gentlemen just as a clarification, so the spike in the deferred product side is that one customer or is it more new products related to a broader customer just trying to get some clarification there?.

This is small number of customers..

That’s helpful..

It's unusual for us to have product like that in our deferred revenue.

There is some piece there, if it's in the programming, it's amortized over time but it's not typical for us to have a transaction or a couple of transactions that are specific product orders in there that would be recognized as a single unit as oppose to amortized every time and that’s distinction we are trying to draw on that out..

So with that being said and the timing and the lumpiness of that how should we think about potentially the next several quarters because you give a lot of new products coming out in the pipeline, there is some share gains we're seen in A10 gain on the DDoS side, so do we spike up and then kind of moderate or do we actually can grow just so that we can model the next several quarters just in qualitative comments would be helpful?.

Well, so first off I think that specific guide for next quarter is relatively smooth growth off of what we've seen this quarter. And I think we tried to do tightly relatively explicit large deals or something that -- with to the sense of their speculative and lumpy are something that we're not trying to call when they are going to come in.

And CGN is actually a great example of that, because it is primarily a service provider product that’s been a source of lot of lumpiness in the past.

So I think what we're aspiring towards is smooth progressive revenue growth going forward with the lumpiness being the upside potential, so that the spikes are above our guidance not required to get to a guided number. I hope that will be helpful..

And maybe on Japan, that’s a region where you saw lot of concentration.

It has not yet recovered, are we at the point of turning the corner in Japan any time soon?.

I think we see the macro-pressure in Japan. Especially within our service provider customers and over the past year we have really worked very hard to build up our business outside Japan to diversify our geographic revenue mix. Overall revenue from Japan has become a low percentage of A10's total business.

And that being said we continue to have a strong engagement and strong position for all service viable customers. I think that when the service providers buying hasn't increased real benefit from the service provider buying increased..

And Greg it's good to see the decline in DSO to 95.

Can you reduce that by 15 days every quarter?.

I don’t know we can do by 15 days every quarter but our expectation is that number will be on the decline overtime. Yes..

And we'll go next to Rod Hall of JP Morgan..

I got a couple, the TPS percentage you got greater than 10%, but my recollection you were originally thinking TPS would be 10% by the end of year.

So is that an acceleration of TPS in your mind, then so what the portion of revenue do you expected to be by the end of the calendar year here? And I wanted to also ask you about KDDI vThunder selection and whether that, is that just keeping you in the game with KDDI or does that have incremental revenue impact? And then I had one more follow-up for I guess as well..

So first off on the 10% where TPS is declared by the 10% for the first half is 10% of product revenue, and that we’re just describing as the milestone on our way to 10% of revenue. And so it's not the achievement of a goal but we think it's a significant milestone showing progress towards that goal..

Let me answer. I think we’re really pleased with the TPS momentum and growing pipeline, definitely our goal is to compute growth to the TPS revenue in the upcoming quarters..

Just a follow-up on that, if you guys are already over 10% of product revenue. Is it -- do you think of services revenue positive or low than you are rolling another 10% of total revenue by the end of the year? It just seems like that's a little bit ahead of schedule for me..

TPS has performed well for us, and we’re really pleased and that’s why we share with you it's a important milestone with our view. The service revenue is really a matter of the how long you've been in the business, because it relates to the number of customers, number of revenue has build over the years.

So we don't expect service revenue will spike quickly in the TPS. But we have a good momentum in TPS but pipeline remain very strong..

And then on KDDI, just what's the incremental impact from that?.

KDDI we have a module business with KDDI. In this specific -- some for KDDI call this infrastructure, is we’re rephrasing a current vendor of a preferred ADC vendor in that KDDI call infrastructure..

And how bigger proportion of their ADC expenditures is that, is it 5% or 10% of is it a very large proportion of their overall ADC expenditure that would get to the part of the infrastructure..

We typically don't breakout the really the lines, we don't breakout our business with the particular customer, we wrote a bond, really breakout customers revenue opportunities..

And then I just wanted to clarify one more thing and I'm done. As you guys have said before that you should be approaching guidance that leading out certain -- lot of the carrier deals that are in your funnel because you had bad luck with estimating the timing of completion of those deals in the past.

Is that still the case when you give guidance are you leading out of the guidance potential carrier deals that might develop or how are you treating the carrier deals in the funnel and the guidance at the moment?.

I don't think we -- we haven't left them out of the guidance, what we've described is using appropriate conservatism and divining at the beginning of the quarter what our line sight is to close in a particular transaction and that's the methodology reviews for last couple quarters, it's the methodology we're using for Q3 as well.

So there is particular transaction within the current quarter was something that we had clear line of site on as we entered the quarter and it played out that well.

But what we’re doing is changing the risk adjustment that we apply to these and provide making it a very high hurdle for a large service provider to clear before it has any dollars in the guidance fled alone a large amount in the guidance..

So we have a higher quality of pipeline and forecasting process. This field has always been part of our forecasting process. So is now being left out, but it did provide upside..

And we will go next to Brent Bracelin with Pacific Crest Securities..

Couple of questions if I could here.

One, wanted to start with the large CGN deal in the quarter, as you think about kind of that purchase is this kind of a one-time buy or do you expect some follow on CGN business outside of the current quarter?.

I think the customer has been A10 customer for quite a while. So that customer continues to buy almost every quarter but in terms of large deal it's always hard to predict when they're going to buy but they are always being a good A10 customer.

We see them continuing to purchase while A10, but your side that’s where we don't have control that's where we apply our forecasting [perhaps] a conservatism and anticipate the large deal. Large deal will provide upside to our guidance..

And then shifting gears just to security, obviously TPS 10% of product revenue you talked it about SSL Insights.

I'm wondering if you could just talk to the pipeline, what's the pipeline visibility around security, it seems like you are having a little bit more success here expanding the pipeline beyond ADC and CGN in the security? What's the pipeline look like relative to this security business in the second as you kind of enter in the second half of the year?.

I think the pipeline going into Q3, we say a vast security feature in ADC and TPS both are strong..

Are you seeing any sort of change to the competitive environment or as you roll out TPS have success with TPS, have some success with that SSL Insight, who are the competitors you are running in to the most there? Who are you winning business the most versus in the past, the core ADC market?.

I think -- if you look at ADC with advanced feature. We like our position, we like our technologies. Just to give you an example, SSL Insight, when we compete we mostly compete with other security vendors.

Then on the TPS, I think as I mentioned in the call we release a very important aGalaxy centralized management system or TPS that’s very significant. We have the several customers that are engaging with us on developing the centralized management system. So we like our position.

I think just based on the pipeline and growing momentum we think the product is very well positioning the market space..

And then wanted to also; my last question here is just a follow-up on kind of the product deferred, just to be clear was that reason that the product deferred kind of spiked here? Was that tied to orders that you received late in the quarter that you were unable to ship or was it tied to orders for products where you have some sort of new software capabilities that you weren't able to recognize yet?.

It's more the latter that we are doing some innovative functionality for them, but they wanted them paid ahead of time, so that’s why it's in deferred so in the backlog..

And that software functionality, do you plan to have the ability to fulfill that in Q3 or is it at some point in the second half of the year?.

We -- can't go into any of the specifics on that either as to what it is or the timing at this point..

I'll ask one another follow-up.

Is that assumption that you have additional functionality baked into the Q3 outlook? Or is it not factored into the Q3 outlook?.

It's a -- the existence of the functionality is not related to our Q3 outlook at this point in time..

And we'll go next to Jim Foster with Morgan Stanley..

Just a couple of quick questions from me. First, clarification a little bit surprised to see a sequential decrease in R&D and just wondering if there was -- departures there you're figuring out hiring kind of what drove that, just a clarification? And then on the enterprise side it seems like you're clearly finding some success there on that refocus.

How much incremental improvement you think you can make in the enterprise as you continue to re-work the sales force, I think you put a lot of effort into that. I'm just wondering how much you think is sales force versus improved product targeting et cetera.

And finally the last question from me is just how we should be thinking about security and where the -- ultimately you'd like to target that segment being as a proportion of your total of least product revenue?.

I think you get all three of us that I'll handle the R&D question, later we'll pass over to Ray for the sales as the sales correspondent and back to Lee for the securities, so I think you got us all here.

On the R&D side the sequential down movement there was related to few items that are incidental, legal expenses relating immigration some of those items, but also our hiring was a little bit slower in the quarter and we had anticipated which led to some of that as well.

But as we go forward we do expect that line items as well as the others to grow into the Q3 number as indicated by our guidance..

Jim this is Ray Smets, I'll take the enterprise question in terms of incremental improvement. I can't give you any specific numbers on this but I will tell you from a sales execution perspective.

In addition to keeping the iron very hot and the service provider fired we're working pretty diligently to keep mining our way into the enterprise domain which is a big upside for us.

We are seeing a quarter-over-quarter improvement in sales productivity as a result of that this is coming from a number of things including sales and improvement but also additional investment in our infinity channel program, which is targeted specifically to the ADC and very, very much targeted in to the enterprise.

Ongoing marketing efforts to make sure that we’re getting the demand out of the field and getting the leads that we can turn into qualified leads and then targeting certain areas in the marketplace where we have exceptionally good and strong traction such as the web 2.0 domain.

So we do expect to see enterprise continue to be a strong growth area for as well, and we’re hoping to benefit from the service provider turnaround that we hope to see sometime in the near future as well..

Can I just ask before we move on, I just want to ask quickly where you feel like you are at from a sales person productivity standpoint on enterprise and carrier right now?.

So I'd love to give you some details on that, but I can't really give you any specifics, but I will tell you again as we look at this very, very carefully, it's a growing company, making forward investments in growing our geographic mix and our execution in North America we're forward investing but the good news is we’re beginning to see the return on that investment in terms of expense to bookings ratios and cost to revenue ratios.

We’re moving the needle in the right direction..

I think the next part of your question is about security?.

Customers delivering a [indiscernible] always being a vision for A10 and we have played at the high-end of the market and many of our customers really asking us to expand our portfolio into security.

So we’re putting fairly significant amount of our R&D into security, but we’ll not comment on unannounced products but we do expect we continue to invest in securities..

Next question please?.

We’ll go next to Rohit Chopra with Buckingham Research..

Had three questions for you. I wanted to ask about product gross margin. I know you are blaming currency is one of the factors there, but Japan is down as a percentage of the mix when you look at it over year-over-year.

And I just wanted to know what else is actually driving the gross margin or product gross margin down is it a function of maybe more deals coming through the channel. I know there was some discussion of that in your prepared remarks. So if you could just explain why we’re going from 78.3 last year down to 76.4, I think that would be helpful.

And a question for Ray, can you tell us how much is actually coming from the channel and if that’s going to expand should we expect more pressure on gross margin. And then the last question I had I know Mark is being happy about the DSOs coming down, but they are actually still high at 95 days.

And if you look at the revenue number for what you did last year and what you are doing now which is 47.5 if you look at what you did last year 45. If you look at your service provider mix and enterprise mix it's almost a same at 64 day.

So I'm just trying to get a sense of why the DSOs are still high when we’re roughly at the same revenue level, and we’re still roughly at the same service provider enterprise mix. So DSO, product gross margin and then maybe if you can give us a sense about the channel..

Let me that two license one first and then Ray can do the channel one.

So on product gross margin the yen is certainly an impact on that has actually the yen and Japan are impacting two ways because the compression from on the revenue line for Japan last year versus this year is about $700,000, in other words our revenue would have been $700,000 higher with the business Japan did this year if it had done at last year's exchange rate price.

So there is a compression that occurs that 40 basis points that was referenced in the call, but additionally Japan a year-ago was a much larger percentage of our business and it was bringing a high gross margin in and so the mix of business from what had been higher gross margin markets Japan the U.S.

to some of the lower gross margin markets has been an impact on the gross margin average itself. So that’s on the product side. And so I think those are the main affects.

And then there are other ancillary things that's hidden there, and again this is just focused on the product side, service has different dynamics which is actually gone up in the course of the year as we seen an increase in the maintenance gross margin.

So those are the primary effects on the gross margin and as we adjust the guidance we’re not necessarily saying that we expect it to go down further but rather we want it to have the guidance range more accurately reflect at the midpoint where we see gross margin coming out versus having at the boundary.

The DSO on that metric 95 is the higher number; it's certainly not what we’re shooting for. I will note that the quarter we just finished was our largest invoicing quarter we've ever seen.

And so beyond what we saw on revenue we saw very high invoice number coming through, we moved collections aggressively forward, we've more work to do on the collection side but again the geographic mix has some impact on this as well, where is the U.S.

and Japan tend to be rather fast payers some of the other markets are not quite as prompt and so that is the pull out last year versus this year.

So I think that the important thing for us is that we're at a point where we're progression it forward, we’re not seeing a lot of issues inside of our receivables as in occasion people are slower than you would like than to be..

And Rohit this is Ray Smets. I think your question was around how much of the business is coming from Channel and what the potential impact that might have on gross margins. Keep in mind generally speaking with the exception of a very few select customers they wish to do business direct we're already a channel based company.

So what we're doing with the affinity channel program as we roll it out globally is in addition to improving the programs we're actually improving the productivity of the channels, we're leveraging the relationships we have in place but we're also improving the productivity of key channel partners by incenting their behavior.

And the incentive is really not gross margin impacting it's market extensionary impact we're getting access to deals that we normally would not see.

How much of this will come from channel or the improvement from the infinity channel partner it's pretty obvious to us at this point as we look at some of the factors that we track very carefully in the regions where we've rolled out affinity that the deals that we're receiving that are registered by channel partners so from channel whether it's closed or pipeline generated from this activity is our actually going up.

So the good news is the investment we're making in channel as Lee has already mentioned is actually improving overall sales performance. We expect the leverage of that as we go -- get it out globally..

And we will go next to Catharine Trebnick with Dougherty..

Nice print.

Can we go back to your TPS product? Are you seeing high demand in that from the carrier and or enterprise or both and then who would you see most when you compete against?.

It is a mix of enterprise and service provider customers. We saw a good mix and also the new and follow on order from the current customers.

Q - Catharine Trebnick So when you -- and just so I jumped on the call late just so I have this clear, the 10% from that TPS product is for the first half of the year?.

Yes. First six months of this year TPS product revenue is slightly over 10% of total product revenue..

And then most the sales include like the ADC exactly, right?.

No we said TPS is a standalone product and probably TPS remain to be standalone product..

And then how are your sales going with the ADC and the security product like the WAP?.

In general ADC with advance [coding] features gaining momentum the sales are being -- if you look at the overall ADC sales year-over-year I think better than what we expected but we are very pleased we'll continue to invest aggressively into security features of ADC..

[Operator Instructions]. We will go next to Mark Kelleher with D.A. Davidson..

Just to make sure I understand one more time on the deferred revenue because that's kind of going to form the base of another question I have.

That was kind of the unusual situation kind of a customer announce for it, it's not something you anticipate as a ongoing basis that you would be selling in that manner is that correct?.

That is absolutely correct..

So my question is would you ever consider subscription revenues some offering like I know you are your competitor F5 offers their Silverline on a subscription basis.

Is that anything you would ever contemplate?.

If you look at the rest of let's say subscription revenue, so our product is flexible -- our product is so flexible we can offer a subscription when you need the mark-to-market requirement we will do that..

And we do have subscription pricing out on our virtual products currently, customer adoption is not been particularly high yet, they still economically prefer buying that software front but we have it in market and available and have the systems to support that..

And then just on the competitive side getting back to the DDoS, I know Cisco is going to ramping later this year with a OEM partner that's a competitor of yours. Do you -- how do you view Cisco as coming into the market and a kind of change better environment..

Where now we see anything change in terms of the comparing our TPS moment is actually strong and pipeline is growing. So we like our precision, so we'll let them market play out..

It appears there are no further questions at this time. Mr. Chen I'd like to turn the conference back to you for any additional or closing remarks..

Thank you all of our shareholders for joining us today and for your support. Thank you and good day..

This conclude today’s conference. Thank you everyone for your participation..