Riverbed Technology Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 7.13 | About: Riverbed Technology, (RVBD)

Riverbed Technology (NASDAQ:RVBD)

Q4 2012 Earnings Call

February 07, 2013 4:30 pm ET

Executives

Renee Lyall

Jerry M. Kennelly - Co-Founder, Executive Chairman, Chief Executive Officer and President

Randy S. Gottfried - Chief Financial Officer and Chief Operating Officer

Eric S. Wolford - President of Products & Marketing

Analysts

Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

William H. Choi - Janney Montgomery Scott LLC, Research Division

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Ryan Hutchinson - Lazard Capital Markets LLC, Research Division

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Brian T. Modoff - Deutsche Bank AG, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Alexander B. Henderson - Needham & Company, LLC, Research Division

Shebly Seyrafi - FBN Securities, Inc., Research Division

Roderick B. Hall - JP Morgan Chase & Co, Research Division

Paul H. Mansky - Cantor Fitzgerald & Co., Research Division

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

George C. Notter - Jefferies & Company, Inc., Research Division

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Kent Schofield - Goldman Sachs Group Inc., Research Division

Operator

Good afternoon, my name is Jamaria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Riverbed Fourth Quarter and Fiscal Year 2012 Financial Results Conference Call. [Operator Instructions] Thank you. I will now like to turn the call over to Ms. Renee Lyall, Director of Investor Relations. Madame, the floor is yours.

Renee Lyall

Thank you, Jamaria. Welcome to our conference call for the fourth quarter and full year 2012. The speakers today are Jerry Kennelly, Chairman and CEO; Randy Gottfried, Chief Operating and Chief Financial Officer; and Eric Wolford, President of Products and Marketing. A press release detailing our fourth quarter and full year results was distributed today at approximately 1:05 p.m. Pacific Time over Business Wire. The press release is also available on our website at riverbed.com. The conference call is being webcast live at riverbed.com/investors, and will be archived on our website for the next 12 months on the Quarterly Earnings and Events pages.

Our discussion today will include forward-looking statements, including statements regarding our products and technology, markets, performance, strategies, repayment of outstanding debt and our financial outlook. Forward-looking statements are only predictions and involve risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that affect our results are summarized in our quarterly release and described in detail in our SEC filings.

Forward-looking statements are made as of today's date only and Riverbed disclaims any obligation to update any forward-looking statements. Unless otherwise stated, all financial information discussed on today's conference call is presented on a non-GAAP basis. Non-GAAP items are described and reconciled to GAAP results in today's press release and in a supplemental reconciliation available on the Investor Relations portion of our website. Any future products, features or related specifications that may be referenced during today's call are for informational purposes only and are not commitments to deliver any technology or enhancements. Riverbed reserves the right to modify or cancel future product plans at any time.

I would now like to turn the call over to Riverbed's Chairman and CEO, Jerry Kennelly.

Jerry M. Kennelly

Thank you, Renee, and good afternoon to everyone.

Looking back on the past 12 months, I can see that 2012 was not only a year of transformation for IT, but also for Riverbed. It was a year in which we expanded our addressable market through internal innovation, strategic acquisitions and new partnerships.

In 2012, we introduced more new products than in any period in our history. Within our core WAN optimization business, we introduced both the CX and EX Steelhead appliance platforms and made important upgrades to our RiOS software. We also launched Granite, a groundbreaking technology that allows 100% consolidations of servers, storage, backup and desktop infrastructures to the data center.

We brought to market new Cascade appliances, and in the fourth quarter, delivered a comprehensive suite of Cascade Virtual products. We also acquired OPNET, a leader in application performance management, expanding our addressable market.

Within Stingray, we were the first to offer fully integrated virtual ADC with Web Content Optimization. And we launched new Whitewater appliances, targeted at larger-scale customers.

Across all these products, we expanded distribution and technology relationships with important partners like Dimension Data, EMC, Juniper, Microsoft and VMware. All these products and partnerships contributed to our 15% revenue growth in 2012, and they set the stage for years of continued expansion.

We continue to receive industry recognition and awards for our product innovation. Steelhead captured more than 52% revenue market share and was positioned again in the Leaders Quadrant of Gartner's Magic Quadrant. Steelhead was named Technology of the World for WAN acceleration for the seventh consecutive time by InfoWorld. Granite was also awarded Technology of the Year by InfoWorld and is also a finalist for Storage Magazine's Product of the Year.

Riverbed's performance management offering was included in the Leaders Quadrant for application performance management. And our Stingray software ADC was included in the Visionaries Quadrant. It was also winner of the Cloud Award for Web Services Excellence.

The infrastructure connecting users around the world is crucial to global businesses and governments today. IT administrators have to rethink and evolve the infrastructure to be flexible, yet more secure, more cost effective and to better deliver applications and services to end users.

Applications and services are no longer hosted locally or within a single data center. There are public and private clouds that traverse the WAN to the end user. The end users in mobile expecting fast and reliable access to applications all the time, on any device.

Gartner estimates that up to 80% of end-user traffic will reside in the WAN by 2014. Given our long history and expertise in moving data over the WAN, Riverbed cannot be better positioned for this dynamic shift.

Riverbed's mission is to ensure the best experience for the end user. To this end, our platforms will offer multiple solutions that will set the performance standards in this highly virtualized and mobile world.

Riverbed Steelhead will accelerate the movement of data over the WAN from whatever point it originates to any user, on any device, anywhere.

Riverbed Granite is the evolution of next generation of WAN optimization that facilitates complete centralization of all data services, while it projects the data to the remote site. This allows users to access files as if they were on their LAN, but the data and storage live in the data center. The architecture enabled by Granite is significantly more cost effective and secure than distributed servers and storage.

Riverbed Stingray accelerates the responsiveness and delivery of applications from anywhere they may be hosted.

Tying this all together is Riverbed's performance management, or RPM, the combination of Cascade and OPNET technologies. The integration of OPNET and Cascade creates a comprehensive performance management solution much greater than the sum of the 2 parts. RPM returns visibility control to the operations team. The ability to monitor real-time end-user experience is critical to the success of highly virtualized and hybrid infrastructure evolving today.

With these tailwinds, we are excited as we enter 2013. Last month, we hosted our annual sales kickoff, where we had 1,600 employees and partners joined us from around the world. The energy and enthusiasm of everyone at the event was contagious, as we all see the tremendous opportunity ahead of us, driving industry-leading technology into multi-billion dollar markets.

Before I turn the call over to Randy, I want to announce that Steve McCanne, our Cofounder and CTO, has decided to leave Riverbed. Among the interests Steve will now pursue are important charitable activities at the intersection of medical research and technology.

Steve and I cofounded Riverbed in 2002. Steve's visionary approach to solving what had been fundamental and persistent problems associated with distributed computing led to the creation of what is today a billion dollar revenue company, employing more than 2,500 people. As Steve departs, he leaves behind an enormously talented and deep bench of technology veterans at Riverbed who are committed to taking us to the levels that both of us envisioned over 10 years ago.

I'm joined by all of Riverbed's employees in thanking Steve for his profound contributions to Riverbed's success.

I will now turn the call over to Randy to discuss our fourth quarter results and first quarter guidance.

Randy S. Gottfried

Thanks, Jerry. As a reminder, unless stated otherwise, the numbers I'll discuss are non-GAAP. Please refer to our website and press release for a full explanation regarding our use of non-GAAP information.

As you know, we closed the acquisition of OPNET on December 18, so Q4 results include about 8 business days post acquisition. As I go through the quarterly and year end detail, I'll highlight some of the key areas of impact.

Total Q4 revenue was $239 million, up 9% sequentially and up 17% year-over-year. For the full year, total revenue grew 15%. OPNET added $7 million to total revenue.

Total fourth quarter product revenue was $157 million or 66% of total sales. Product revenue grew 9% sequentially and 12% over the year-ago period.

Total Service & Support revenue was $82 million, representing 34% of total sales. Service & Support revenue grew 10% over the prior period and 28% over the prior year.

In the fourth quarter, 83% of total revenue came from WAN optimization. Performance management, including Cascade and OPNET, contributed 12% to revenue. Stingray was 5% of revenue.

Turning to distribution, 93% of sales were indirect and 7% direct. We had 2 greater than 10% distributors in the quarter, with Arrow at 19% and Avnet at 14%. We had no 10% end-user customers in the quarter.

We saw growth sequentially and year-over-year across the major regions. Americas represented 59% of total revenue in the quarter, EMEA contributed 28% and APJ was 13% of revenue.

Looking at verticals, government, manufacturing, financial and professional services each contributed more than 10% to total revenue.

Moving on to costs and expenses. Product gross margin was 81.4% in Q4 compared to 82% -- excuse me, 81.2% in Q3 and 80.8% 1 year ago.

Services & Support gross margin came in at 74%, compared to 76.5% in the third quarter and up from 72.5% 1 year ago. As we described last quarter, our Q3 service margin was atypically high, and as expected, returned to our target range of 73% to 75% in the fourth quarter.

Q4 total gross margin was 78.9%. For the full year, gross margin was 78.5%.

We added 79 employees in the fourth quarter, with another 686 employees added from OPNET. As of December 31, total headcount was 2,567.

Total operating expenses increased 13% sequentially to $125 million. Excluding OPNET, operating expenses were $119 million, within our guided range.

Operating margins for the quarter were 27%, compared to 29% in Q3 and 1 year ago. Excluding OPNET, operating margins were 28%. While OPNET was roughly breakeven in the short stub period, the company has typically had operating margins in the mid to high teens.

Going forward, the blended Riverbed and OPNET margins will reflect the combination of our different business models. I'll go through Q1 specifically with guidance.

As we said when we announced the transaction, we believe OPNET will be accretive to Riverbed's non-GAAP EPS in 2013, with more meaningful synergies expected in 2014. While there are expected expense efficiencies that will be achieved later this year as integration proceeds, most of the synergies are expected to come from revenue growth. That said, we're targeting to reach our 30% target in the second half of 2014.

Interest expense was $1 million in Q4. I'll talk in more detail about the interest and debt in my balance sheet remarks.

Our tax rate in the fourth quarter was 26%. As you may know, OPNET operated with a tax rate in the high 30s as a percent of pretax profits. While we plan to eventually improve on that, our blended tax rate will go up, at least this year. I'll talk more about that, along with the recently renewed R&D tax credit, when I discuss guidance.

Net income was $46 million or $0.29 per diluted share in Q4. Excluding any impact from the purchase of OPNET and interest expense on the related debt, EPS was unchanged. For the full year, net income grew 9% to $163 million or $0.99 per diluted share.

Moving to the balance sheet and cash flows. Cash flow from operations was $54 million in the fourth quarter and $239 million for the year. Free cash flow was $49 million in the fourth quarter and $217 million for the year.

We ended the December quarter with total assets exceeding $2 billion. Cash and investments totaled $530 million. Days sales outstanding were 43 days in Q4 compared to 36 days in Q3. Excluding OPNET, DSO was 34 days.

As you may know, OPNET had a practice of providing much longer payment terms than Riverbed. On a blended basis, we expect DSO to be in the 40s for 2013. Our longer term -- our goal, excuse me, is to bring DSOs back into the 30s in 2014.

Inventory totaled $24 million at December 31 compared to $19 million at September 30. OPNET added $4 million for the quarter and inventory balance.

Total deferred revenue was $271 million, up 12% sequentially. If we exclude OPNET, deferred revenue was $245 million.

As part of the OPNET acquisition, Riverbed issued $575 million of debt. The interest rate, including amortized upfront costs, is about 4.4% per year and is tied to LIBOR. The loan term is 7 years. While we don't anticipate much principal repayment in 2013, we would see using about half our free cash flow to repay the loan beginning early next year.

Given the historically strong cash-generating capacity of Riverbed, it's quite possible we repay the loan prior to its actual maturity.

Overall, 2012 was another solid year of execution for Riverbed. And as Jerry said earlier, we enter 2013 optimistic about the opportunity that lies ahead. Still, as you've heard from other companies, the economic environment remains mixed, so we try to be prudent as we go into this new year.

We're providing guidance for Q1 2013 only. For the first quarter, we expect total revenue between $257 million and $266 million, up 40% to 45% over the first quarter of last year. We expect OPNET to contribute $45 million to $50 million of the total. After Q1, we'll return to our practice of providing total revenue rather than specific items by product line.

We expect product and service gross margins to be about flat with Q4. We anticipate operating expenses between $144 million and $149 million and operating margins between 21% and 22%. Other expenses will net to about $7 million.

We expect a tax rate of approximately 19% to 20% in the first quarter, which includes the catch-up benefit related to the renewal of the R&D tax credit. After Q1, we should see our tax rate between 26% and 27% for the remainder of the year.

Our Q1 EPS guidance is $0.23 to $0.24 assuming a fully diluted share count of 172 million shares.

Let me turn the call over to Jerry.

Jerry M. Kennelly

Thank you, Randy. In 2012, our total revenue grew more than $111 million, with WAN optimization contributing most of that increase. Cascade delivered the strongest percentage growth, underpinning our strategic decision to acquire OPNET. And our newer product lines are also off to very good starts.

In 2013, we look forward to continued revenue expansion, as we benefit from growth within our core WAN optimization business and integrated performance management product line and ramping sales of our software ADC products.

I'm very optimistic as we enter our first year as a billion-dollar-plus revenue company. I'd like to take this opportunity to thank Riverbed's customers and our employees and partners for their efforts this past year. I look forward to their continued support in 2013 and beyond.

With that, we will open the call for Q&A. Operator Jamaria, could you please open the Q&A?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Jayson Noland with Robert W. Baird.

Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

Jerry, maybe more on the integration of OPNET. How fast do you plan to integrate the company? Are you including cross-selling in the Q1 guide? What should we expect as the year unfolds, also?

Jerry M. Kennelly

Yes. So we've had 8 days together in December and we're in Q1. We -- the OPNET sales force will be fully integrated into the Riverbed sales force starting with April. For March, they actually had a fiscal year that ended in March, and March is the final quarter of their last compensation plan. So while we train the Riverbed people, cross-train the OPNET people, we're letting them earn out their original comp year, get to their targets and they're accelerated this quarter, and then we'll blend the 2 sales forces starting April 1. And there's been a lot of work and effort on that. And so far, it looks pretty good. We had the OPNET people in for our sales kickoff here 2 weeks ago. They're thrilled to be part of Riverbed. They brought a great group of customers with them. They now get access to our customers. And the cross-selling, frankly, has already begun. People aren't waiting for April 1.

Operator

Your next question will come from Bill Choi with Janney Capital Markets.

William H. Choi - Janney Montgomery Scott LLC, Research Division

Okay. Just wanted to understand a little bit about the WAN op performance here. By my calculation, it looks like that segment was up 4% sequentially. And can you parse that out between maybe the traction on Granite versus the core WAN op? And how the -- if the prior conversations about it tracking above the original Steelhead ramp is still valid?

Eric S. Wolford

Yes, this is -- Bill, this is Eric. Yes, the core WAN optimization growth sequentially was 4%. 9% was the growth year-over-year. And most of that is core WAN optimization. Granite is still a very small number, even though it's doing very well. We're very pleased. It exceeded our expectations for year 1. We've completed the first 3 quarters and the business is doing well. We really are getting a better understanding of the use cases for Granite. They're very exciting. Funnels are filling. It's good. But the core success of our -- with WAN optimization, the results have been mostly WAN optimization oriented.

Operator

Your next question will come from Brent Bracelin with Pacific Crest Securities.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

I want to just follow up on that. The WAN optimization market, as you kind of think about next year, it looks like kind of the last couple quarters here, we're looking at kind of 9% year-over-year growth in kind of the core WAN optimization market. How should we kind of think about that opportunity as we kind of look into the next -- in 2013, 2014? Is there an opportunity to see an acceleration in that market? Or really, would that take meaningful share gains to get back to kind of double-digit growth?

Jerry M. Kennelly

Brent, this is Jerry. Yes, it was 9% in 2012, which is not a bad result in a tough year. With a little stronger economy, we'd have been double-digit growth. There are catalysts for that to increase. We think the Granite product will be part of the -- with Steelhead and the WAN optimization product line, and that has a lot of promise for next year. As we get into the second half of next year, that's when the first sort of refresh cycles of the old Steelhead sold years ago really should start kicking in strongly. And in fact, there's a good future for WAN op. We're the leader and that we will take more market share. But beyond that, it's just not a WAN op story anymore for Riverbed. We spent a lot of time and money and effort bringing in multiple product lines. The other ones have great growth rates. They're synergistic to the Steelhead. And in the total story of Riverbed now, it's more than WAN op, yet we still feel good about WAN op.

Operator

Your next question will come from Ryan Hutchinson with Lazard Capital Markets.

Ryan Hutchinson - Lazard Capital Markets LLC, Research Division

I just wanted to understand the motivation behind Steve's departure. Clearly, he's been instrumental in the company's strategic direction and I think it's a bit odd, considering it coincides with the close of the OPNET acquisition. So maybe just understanding that a bit more would be helpful. And also, who's taking his place?

Jerry M. Kennelly

Ryan, we did the OPNET transaction in October. So it's almost 5 months ago now, although the final formal closing was in December. Steve has had an incredibly successful run here. It's been 11 years, which is a long time. He's a sharp guy with a lot of diverse interests. And there's other things he wants to be involved in, so he's going on to do that. We have a very deep technical bench. And we start year 12 for Riverbed in May. We have 2,600 employees, of which 1,000 are technical, engineering and R&D type people. The CTO position at Riverbed -- like many companies, was an individual contributor position that doesn't have operational duties but thought big thoughts, we also have a Chief Scientist who was the Chief Scientist of a big group at Cisco. We have a -- the Chair of our Strategic Technology division, who's the ex-CTO of all of EMC. We have multiple -- we have a Chief Development Officer who's the inventor of Granite, which is our really hot technology. And we have multiple Senior Vice Presidents of Engineering organizations. So we have a big group here, a lot of talent. We will miss Steve, but it's more of a sentimental loss than it is an operational loss. We don't expect to skip a beat in terms of innovation and the future technology division of the company. In fact, all these resources I just mentioned report to the fellow sitting next to me here, Eric Wolford, who's the Head of Products and Strategy and Technology. And Eric has never been more optimistic.

Operator

Your next question will come from Subu Subrahmanyan with JudaGroup.

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Could you talk about government vertical? How much federal contributed as a percentage of revenue this quarter? And what the trend you're seeing in the federal market is?

Randy S. Gottfried

Sure. So this is Randy. So in Q4, about 15% of our revenue came from the government vertical. That's not just federal, but that's state, local and non-U.S. as well. That compares -- it's down a little bit year-on-year. It basically came in around as expected. We did came in -- come in a little bit lighter. And I think had that come in more to forecast, we would have seen the top line be a little bit higher. We're conscious of all the dynamics in federal and government spending overall, though we look at the funnel of activity. We look at the problems they're trying to solve. We think that -- we think we have a shot to fare very well within their budget prioritization. So overall, certainly, in the long term, we're optimistic.

Natarajan Subrahmanyan - TheJudaGroup, Research Division

And if you look at your mix starting this quarter, it seems like it will be about 30% in the performance management side and 70% in WAN op. And just curious, I mean, kind of how you think about growth rates in those 2 market segments.

Eric S. Wolford

Well, Subu, this is Eric. Our most recent quarter, we saw that the performance management business, which, not including OPNET, just Cascade, right, not including the 8 days of OPNET, had strong 30%, over 30% growth year-over-year. And so we -- one of the reasons that motivated us to do the transaction with OPNET was because we saw performance management as a very attractive growth-driving segment. And so we're going to move from just network performance management to application performance management, and we think it is going to be a top line revenue growth driver for Riverbed. If you look at our application delivery business as well, you'll see it was also a big growth driver with triple digit growth for the year. Even though it's a smaller number, it too contributes to help to move the needle. So we are getting strong product expansion and growth support from these other business areas to complement our optimism in a kind of robust WAN optimization growth in and of itself.

Natarajan Subrahmanyan - TheJudaGroup, Research Division

And would you put some growth rates around those segments, maybe just longer term, if not for this year?

Randy S. Gottfried

I think we're not providing a lot of specific growth rates for our specific product lines. I think we're optimistic about all of them. I think there's a lot of potential. We aren't being -- going to more detail than that.

Operator

[Operator Instructions] Your next question will come from Ittai Kidron with Oppenheimer.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Guys, can you give us a little bit -- I'm trying to look at the revenue guidance for the March quarter. I'm trying to kind of separate your core business from the -- I think it was $45 million to $50 million, Randy, correct me if I'm wrong, that you have associated with OPNET. It seems like that would imply that your core is around $210 million to $220 million in the guide. Randy, correct me if I'm wrong there. It feels low relative to where the consensus estimates were for you for the March quarter before you've added OPNET in there. I'm just trying to understand sequentially into the March, could you explain this 7% sequential decline in your core business? What are the contributing factors there? Do you feel that you can still grow in high teens in that business? How do I think about that?

Randy S. Gottfried

When you look at the numbers and parse out the OPNET numbers that I included, what you'll see is that after you back out $45 million to $50 million for OPNET, that means at the midpoint, we're looking at the non-OPNET portion growing about 17% year-on-year, a Q4 to Q1 drop of high single digits, about 7% or 8%. That's a pretty typical seasonal drop. But I mean, it certainly was in the range of what we've seen over the past few years. Looking to grow in the high teens we think is realistic. Q1s are always tight for us, so we are conscious of that. Overall, like I said, we come in with a very solid funnel of activity. We're optimistic. We see a lot of portions of the business. We have a lot of excitement as we go into 2013. We're trying to be prudent in this economic environment. But overall, we see a lot of goodness especially as we go through the year.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

But to follow up on that, Randy. Your revenue in the March quarter of last year was significantly deflated because of your product cycle. So I don't know that the year-over-year comparison here is a clean, good one indicating on your core business. Are you being more conservative than normal on Cascade? Are you assuming some disruption in your Cascade business or in the OPNET business? I'm just trying to understand where it is in the guidance that you say to yourself, "we could have some disruption here, some disruption there because of this, before people kind of focus again?"

Randy S. Gottfried

Actually, yes. We're conscious of that. I think I'm always a little tenuous when people ask, "Are you more conservative or less conservative than you used to be?" Everything we know is embedded in the guidance. All of the close rate assumptions, everything we see in the field. We are more conscious given the fact that it's the first full quarter after a meaningful acquisition as we combine the product lines, joint -- start joint selling the product. So that does flavor our expectation setting. But like I said, I think -- certainly, as we go through the year, we feel there's some growing momentum with a lot of different product lines, not just the Riverbed performance management.

Operator

Your next question will come from Brian Modoff with the Deutsche Bank.

Brian T. Modoff - Deutsche Bank AG, Research Division

Just trying to get a little bit of flavor for how do you see the -- your organic WAN optimization growth rate? Do you see it improving this year at all? Just, I know you're trying to not break things out by product, but we're just trying to get a feel for the kind of the traditional business. And then how do you see Cascade versus OPNET in terms of relative growth rates this year, looking at those 2 on the performance optimization side?

Jerry M. Kennelly

WAN optimization did 9% for the full year, but there was a weak first quarter last year, as the last speaker pointed out. And then had the first quarter been stronger, we would have been double digit last year. And so we saw improvement in the second half of the year and we're expecting improvement in 2013. So we think it's still a good horse to ride. It's our biggest horse, but it's one of our horses. And so we're going forward with WAN op.

Eric S. Wolford

And then Brian -- this is Eric. With regard to your second question. Yes, I mean we think performance management is a faster grower for us and can drive our top line growth. We're very optimistic about that. It's why we did the deal that we did. We are not going to be so interested in focusing on Cascade or OPNET, but instead the integrated Riverbed performance management product line. We think we have a great combined product line. And that's the -- the top line of that group is what they will be focused on, not so much as a split between one product or the other.

Operator

Your next question will come from Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC, Research Division

Gentlemen, maybe just deeper on sales synergies because that's very important to get to the EPS accretion. Any thoughts of how you'll be combining the OPNET sales force? Is that with the overall Riverbed sales force? Or is that the non-Steelhead sales force? How we might see the synergies across the broad organization and kind of some of the synergies you might also see from a customer base, from a channel base? If you can help there.

Eric S. Wolford

Mark, this is Eric. I'll take the first shot. Yes, I mean, the first way you tell the impact of the synergy is when you get everybody together, and we did that at the SKO. And they start -- sales guys meet with other sales guys and they start comparing notes. And it was quite obvious that there was countless examples of where OPNET salespeople had gotten into very large financial institutions or very large energy companies that Riverbed hadn't gotten into. And our Riverbed team has been trying to get in there. And so now they have a pathway in and they're collaborating. And they think, "Hey, I can sell some of this other -- either Steelhead or Granite or application delivery controllers, via the pathway that OPNET already had." Vice versa, you have OPNET guys who are excited to get into some of Riverbed's accounts that they can go in and sell their application performance management products to those accounts. We've had many specific examples that came up at our sales kickoff. And so that's kind of the earliest indicator. None of those are numbers, right? Those are all anecdotes, I appreciate. But this is the first measure of do we think there's going to be that sort of operational synergy. And right away, I can tell you, both sales forces are very happy because they directly see that synergy.

Jerry M. Kennelly

And this is Jerry. And the OPNET sales force traditionally has a lower sales per head because it was solely -- pretty much solely a direct model in some channels. And they were pretty much concentrated in the U.S. And so by taking their product offerings into our European organizations, into our Asia Pacific organizations, by taking their American sales into our distribution and channel partners in the U.S., we think we can significantly drive up the revenue per rep closer to a Riverbed standard. And that will throw off a lot of profit synergy and productivity as we go forward.

Mark Sue - RBC Capital Markets, LLC, Research Division

But the Steelhead sales force, do they just stick with Steelhead?

Eric S. Wolford

No. I think our plan is to leverage the big sales force. The big sales force will be responsible for selling everything, and they will have in support of them, some overlay sales force. It's just like they have done in the past with Cascade. With Cascade, there was an overlay Cascade sales force that supported the large sales organization, where we will combine the Cascade overlay sales force with the OPNET overlay sales force, and we will continue to operate in that structure going forward. It gives us the best leverage and productivity.

Operator

Your next question will come from Alex Henderson with Needham.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Just one real quick answer. The Cascade, you gave the year-over-year, could you just give us the quarter-to-quarter? But the question I wanted to ask was on the mix between the CX, EX and the old platforms within the WAN op piece. Can you give us some sense of the uptake of the new products that were introduced in the first quarter and how that mix is shifting, please?

Randy S. Gottfried

For sure, Alex. On the first question, your question was I think with regard to Cascade's growth?

Alexander B. Henderson - Needham & Company, LLC, Research Division

Quarter-to-quarter.

Randy S. Gottfried

Quarter-to-quarter. Yes, the sequential growth was 23% for Cascade and then the annual was like over 30% for network performance management. That was without OPNET. Then you throw OPNET in, and you get a different number. And your second question was with regard to -- I think, our language would be CX versus EX. So it's -- there's kind of 2 comparisons there. One is how many are -- new models versus old models I guess is the first one, and we have the majority of people who are buying our new models versus our old. And then inside of our new models, we have a CX and EX. And that split is about -- over 40% are purchasing CX versus CX.

Alexander B. Henderson - Needham & Company, LLC, Research Division

I'm sorry, you just said CX twice.

Randy S. Gottfried

CX versus EX.

Operator

Your next question will come from the line of Shebly Seyrafi with FBN Securities.

Shebly Seyrafi - FBN Securities, Inc., Research Division

So in 2012, you're -- I'm sorry, OPNET by itself, the revenue, I think was I guess maybe around $190 million or so. That's about a $48 million per quarter run rate. You're guiding around $40 million to $45 million for Q1. I'm curious how you see it progressing after you integrate the 2 companies, especially after April, that kind of number, the $45 million to $50 million -- or $40 million to $45 million number going forward.

Randy S. Gottfried

We're not providing a lot of detail. I mean, we're just giving you guidance one quarter at a time. Obviously, the excitement and optimism we have on is to actually grow their revenue. As Eric said, he talked about the synergy potential and opportunity. Clearly, we think that's a meaningful growth business for us. It will take a little time. We're just getting started. We also said that we expect most of the synergies in 2014, but we do expect to make some progress as we go through the year.

Eric S. Wolford

One -- this is Eric. One important point is we definitely want to sell like crazy the OPNET product. But again, when we go to the market, we're going to go with a complete Riverbed performance management product line. So we're going to try to sell Riverbed performance management products. And the Riverbed performance management products, we know in aggregate, or we believe, will grow much faster than our WAN optimization business.

Operator

Your next question will come from Rod Hall with JPMorgan.

Roderick B. Hall - JP Morgan Chase & Co, Research Division

I just got one on the OpEx in Q1, the guidance, $144 million to $149 million. I wonder -- I'm assuming there's some synergy costs in there, some one-off integration costs, I should say. So I just wondered if you could give us any idea how much that is and help us understand kind of what a run rate OpEx might look like going forward, because operating margins look a little weak, right, I assume it's because of the integration. And then secondly, I just wondered, rolling back the clock a few quarters, one of the issues you guys have had historically, which is this complicated marketing message out there, all the different products and getting the distribution channel, sales channel to understand that, and then communicate it clearly to the customer. I just wonder, with OPNET integrated now or as you integrate it, do you have any -- can you guys articulate to us how you intend to go out to the market with all of these products? Do you have any kind of integrated marketing message? If you don't have one, when would you expect to be able to come back to us and maybe articulate that?

Randy S. Gottfried

This is Randy. I'll take the first question on integration costs and I'll turn over to Eric to hit the second question on messaging. But in general, there aren't integration costs in that OpEx number. There's some integration costs by single-digit millions that will be, as typical, excluded on a pro forma basis. We have -- the underlying assumption, as you see in our Q1 numbers, typically, a bit of a step down in sort of legacy Riverbed portion of the business. Expenses tend to spike in Q4 with commissions. They tend to reset in the first part of the year at a slightly lower level. And then OPNET, you'll have a full quarter impact of the OPNET business versus, really, just a few days in the fourth quarter. And then Eric, on messaging?

Eric S. Wolford

Rod, it's Eric. Yes, we just had all of our folks in at our sales kickoff. So of course, we spent quite a bit of time on that with them. And the very simple message is Riverbed is all about performance and we are all about diagnosing and curing various performance problems, all types, from the applications into the network, from the end point, to the data center. And then we have a robust set of cures that range from Stingray to Granite and Steelhead. And so in the end, the highest level message to a CIO is, just like there are security companies that try to address comprehensively security problems, we are a performance company that comprehensively addresses your performance problems. We can help you monitor it. We can help you predict where performance problems will be. We can help solve them when they do come up. We can provide the humans to do it or the products to do it and -- or the channel to do it. So that's the focus of Riverbed.

Roderick B. Hall - JP Morgan Chase & Co, Research Division

Eric, are you guys talking about application performance specifically when you talk to the CIO? Or are you just kind of more broadly talking about performance across the network?

Eric S. Wolford

Probably, multiple perspectives. But certainly, first and foremost is application performance, but they are also very interested in data center to data center, DR, recovery time, recovery point of objective performance, which isn't an end user base, but is part of performance. But the anchor point is application performance, end-user performance, is definitely the starting point.

Operator

Your next question will come from Paul Mansky with Cantor Fitzgerald.

Paul H. Mansky - Cantor Fitzgerald & Co., Research Division

As I look at that $45 million to $50 million guide for OPNET margin, realizing of course you're not -- you're going to be specifically providing OPNET guidance going forward. But consensus, I guess, before the acquisition was, I believe, $52 million or so, which obviously implies you are going to maintain any products that would be considered a redundant on the NPM side, at least for the short term. I guess, the question is twofold. A, do you feel as though you have enough, how should we say, cushion in that number, given potential for some cannibalization? And b, how should we be thinking about those 2 product lines, specifically on the NPM side, progressing throughout the year? Press release mentions, obviously, integration in the back half. Are you going to maintain discrete NPM products throughout that period?

Eric S. Wolford

One of the things -- Paul, it's Eric. One of the things that as we've gotten into it more and more and more deeply, we have discovered just how complementary the products are. There is a modest amount of overlap, but it is very much modest. The center point of OPNET has been around the end-user experience, and the center point of Cascade had been much more around packets and flows. And so combining these 2 is a fabulous story for an IT organization who has multiple consumers. You have application consumers and server consumers and networking consumers, and they all want to stitch together one common view of where an application performance problem might be. And so what we are doing is going to do further stitching together. Right now, we have the raw materials, but we have to do a little bit of integration to sort of stitch that together product-wise. And so we are well on our way. But nothing stops us from selling, right now, that complete story to customers, where you can have best of both worlds. You can have a wonderful network visibility and insight, as well as fabulous application insight, and we'll bring the 2 together in a common dashboard and a common blend.

Operator

Your next question will come from Jess Lubert with Wells Fargo Securities.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Can you talk a little bit more about the general spending environment, how things unfolded through the course of the quarter and to what degree you saw weakness or deals slip towards the end of the period? And then following up on federal, can you talk about what impact you believe sequestration may have in the upcoming year? And is it your expectation that your government business will grow this year? Or do you think that might be flat to down in 2013?

Jerry M. Kennelly

This is Jerry. We had -- Q4 is usually somewhat magic Riverbed and it was again. We had a good strong quarter, particularly in the commercial markets and particularly in Europe, actually. So we saw normal, broad-based spending across our customer base, installed base in most geographies. Government was slightly weaker, actually. I think last year it was 17% of revenue. This year it was 15% of revenue. So there was one slight bit of weakness that was the government area, and probably where we came toward the mid side of our guidance rather than the top side of our guidance. For 2013, the fiscal cliff is mostly solved. We're still facing the sequestration. We believe it will get solved. They're working on it right now, they've already lifted the spending cap and pushed that out to May. So there seems to be a new willingness in Washington to take care of that. The federal government is a big spender at any level. We're just a tiny bit of what gets spent on IT in the U.S. and in the federal business. And we have a product that is prioritized in their spending budgets because of the cost efficiencies it has. If there is a sequestration or it goes wrong, we don't see that happening. If it does happen, it will affect everybody. The past has shown, we're usually less affected than others in those situations. So it would be a broad industry situation, but we're not expecting that.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

So if we look at your Q1 guidance and expectations for federal, is it fair to assume that you're baking in normal seasonality? Or did you haircut that a little bit to reflect the potential to see some of the political battles that are going on right now impact federal spending in the quarter?

Randy S. Gottfried

We baked in everything we know at this time as Jerry has mentioned. Yes, we're not assuming any major federal disruption, so there's not much to add from that.

Jerry M. Kennelly

Q1 is not usually a strong federal quarter anyway, frankly.

Operator

Your next question will come from Alex Kurtz with Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Randy, could you just go back to the 30% operating margin target comment you made earlier. Specifically, I missed that, when you expect that -- to reach that, and what are the levers that you have around that, both revenue and margin and OpEx, to get there?

Randy S. Gottfried

Sure. Our goal is to get back to about 30% in the second half of 2014. Our goal right now is simply to grow revenue faster than expenses as we go through this year. Most of the levers to get to that higher number, we think are in revenue growth. We're not -- as we talked about when we announced the OPNET acquisition, this is not an acquisition we're going to sort of rip them apart and consolidate and reduce costs. This is one where it's about market expansion and fueling growth for the future. So while there's some obvious economic synergies and public company cost reductions and things at the margin we can do, most of the leverage comes from revenue growth. So hopefully, we'll make some progress this year, consistent with how we described accretion and synergies, all that means more as we progress to the end of this year and most of the synergies coming in 2014.

Operator

Your next question will come from the line of George Notter with Jefferies.

George C. Notter - Jefferies & Company, Inc., Research Division

I guess, I wanted to get back to an earlier question about OPNET's revenue contribution in Q1. You guys are guiding $45 million to $50 million and the consensus was higher going into the announcement of the acquisition. So just to be clear, is the delta there a result of discontinuance of certain products within OPNET? Or is OPNET tracking now lower than previously expected? And then as a corollary to that, could you give us a sense for what OPNET generated in revenue during Q4, pro forma, for the transaction?

Randy S. Gottfried

Sure. It's Randy. So in general, OPNET is tracking basically exactly what we expected at the acquisition last fall, so no surprise there. As we said earlier, we were trying to be prudent in this first full quarter post acquisition as we join forces to integrate the products and go to market and make sure the customers get a coherent message. So all that is baked into the numbers that we gave. We think the business is tracking well. The level of business we saw in Q4 was similar to the level of business they saw in Q3. We're not going through a lot of detail on sort of the bookings information for the full quarter. The trajectory looks good, and certainly, no new news beyond what we described.

Operator

Your next question will come from the line of Sanjiv Wadhwani with Stifel, Nicolaus.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Geographic performance in Q4. Europe obviously did really well, did really well in Q3 also, actually. So can you just walk us through what's going on with Europe and maybe just a couple of sentences on, sort of broadly, U.S. performance versus expectations?

Jerry M. Kennelly

Sure. So our strong years in Europe continue to be strong. And Northern Europe, the Nordics, the U.K., especially with U.K., we run -- South Africa, actually which has done quite well for us and the Middle East. Central Europe has actually picked up a bit. We had a killer sales manager in Switzerland who we expanded his territory to include France and Central Europe, as well as Switzerland. And he has just done an incredible job and we've had great expansion there. And the U.S., it had a great commercial quarter.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Did the U.S. track in line with what you were expecting? Or sort of, maybe there were some puts and takes around that?

Jerry M. Kennelly

There's always puts and takes. But yes, absolutely, we delivered a nice Q4 on a balanced basis.

Operator

Your next question will come from the line of Catharine Trebnick with Northland Securities.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Previous quarter, you talked about Asia Pac being a little bit weak. Can you give us some more color on that area and what you're doing there? And also if -- because OPNET was weak internationally, can we go -- I jumped in a little late here, can you go back in to see how you are viewing the -- once you integrate the sales force, how that will work, selling internationally with OPNET?

Jerry M. Kennelly

Yes. So it's not that OPNET is weak internationally as much as they just didn't have much of a presence. So they were focused around the U.S. They're a U.S. company. They have some small operations in Europe and quite tiny in Asia Pacific. And so the point is to expand their presence, expand the availability of their product, get them into our distribution channels overseas and really link that up with APM. Asia Pacific actually making great progress. As we mentioned, Australia and New Zealand is our star out there. India has jumped up dramatically this year through the sales management we put in there. We put a great new sales manager in Japan a year ago, and he's making progress there. The areas we're working on now are really China, which is sort of the last frontier for us to crack into in -- into Asia Pacific, and that will be our focus for the rest of this year, China.

Operator

And we do have time for one more question, and that will come from Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc., Research Division

To help with the guidance and then the go-forward years as we look at modeling everything out, I was wondering if you could help us understand what you look as kind of normal seasonality for WAN op product revenues going forward. And the reason I ask is that obviously, there were some transitions going on a year ago in the March quarter, and it still is -- call it 70% or so of your product revenue. So I think it will be helpful to understand kind of how you think about that and what you're embedding in the guidance for March relative to that.

Randy S. Gottfried

Sure. So I mean, our typical seasonality in the March quarter has been down about 5% to 10% off of Q4. And yes, certain years have had specific things that gone on. But in general, and I've said this publicly a number times, Q1 tends to be our tightest quarter. We tend to finish the year strong. We technically had a sort of a second half growth story and then started out in the first part of the year at a little bit lighter level. We're not -- as you model our future years, I would expect -- I don't have a reason to believe that, that would change. Again, down high single digits, maybe even 10% Q4 to Q1, with most of the growth typically happening in the second half of the year.

Kent Schofield - Goldman Sachs Group Inc., Research Division

And Randy, is that for your WAN op product revenue, just so I'm clear?

Randy S. Gottfried

Yes. That's been WAN op product revenue. It's been some of our -- prior to OPNET, that's been true for a lot of our product lines.

Renee Lyall

Thank you, everyone, for joining us today. During the first quarter, Riverbed plans to participate in the Goldman Sachs conference in February and the Wedbush Securities and Pacific Crest conferences in March. All presentations will be available live on audio webcast on our website. If you have any questions after today's call, please direct them to me at (415) 247-6353.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect.

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