Blue Coat Systems, Inc. F3Q09 (Qtr End 1/31/2009) Earnings Call Transcript

Blue Coat Systems, Inc. (BCSI)

F3Q09 (Qtr End 1/31/2009) Earnings Call

February 26, 2009 5:00 pm ET

Executives

Jane Underwood – Investor Relations

Kevin Royal – Chief Financial Officer

Brian M. NeSmith – President and Chief Executive Officer

Analysts

Jonathan Ruykhaver – ThinkEquity Partners LLC

Erik Suppiger - Signal Hill

Scott Zeller – Needham & Company

Richard Sherman – Mkm Partners

Ryan Hutchinson – Lazard Capital Markets

Alex Kurtz – Merriman Curhan Ford

Samuel Wilson – JMP Securities

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to Third Quarter Fiscal Year 2009 Financial Results Conference Call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session with instructions being given at that time. (Operator instructions) As a remainder this call is being recorded. I would now like to turn the conference over to your host Jane Underwood. Please go ahead.

Jane Underwood

Good afternoon and thank you for joining us discuss Blue Coat's financial results for the third quarter fiscal year 2009. With me on the call today are Kevin Royal, our Senior Vice President and Chief Financial Officer, and Brian NeSmith our President and Chief Executive Officer. Before I turn the call over to Kevin, let me remind you during the course of this call we will make forward-looking statements about Blue Coat Systems, Inc. and our acquisition of Packeteer, Inc.

These include statements regarding expectations concerning market growth and business opportunities, expectations regarding future revenues, expenses, margins, tax rates, and other financial metrics, and other matters impacting Blue Coat's financial outlook and future business. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including any statements of expectation or belief and any statements of assumptions underlying any of the foregoing.

Risks, uncertainties, and assumptions included TO risks that are described from time to time in the reports filed by Blue Coat with the Securities & Exchange Commission, including but not limited to, the risks described in Blue Coat's annual report on Form 10-K for the year ended April 30, 2008, and quarterly reports on Form 10-Q for the quarter ended October 31, 2008. No assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur or if any of them do what impact they will have on the results of operations or financial condition of Blue Coat.

Blue Coat assumes no obligation and does not intend to update these forward-looking statements except as required by applicable law. Now, I would like to turn the call over to Kevin Royal.

Kevin Royal

Thank you, Jane. Let me start by saying that we are pleased with our performance for the quarter given the backdrop of this challenging global economy. Solid sales activity in fiscal Q3, drove our revenues to the midpoint of our guidance range. Our ongoing focus of managing our cost structure allowed us to exceed our non-GAAP EPS guidance, and we also continued to generate strong cash flow from operations.

Now, lets turn to some financial highlights for the quarter. Net revenue for Q3 was 109.6 million, a 35% increase, compared to net revenue of 81.4 million in the same quarter last year. Please note that year ago quarter results did not include any revenue associated with the Packeteer transaction. Excluding net revenue associated with the acquisition of Packeteer, net revenue for fiscal Q3 of 2009 was $86.4 million, an increase of 6%, compared to net revenue of $81.4 million in the same quarter last year.

Product revenue for fiscal Q3 was $72.5 million, compared to $84.8 million in the prior quarter. Included in product revenue, are sales from Packeteer products, which are $14.2 million, compared to $17.9 million in fiscal Q2. Sales of Blue Coat Webfilter was $6.8 million, compared to $6.6 million in the prior quarter.

In the third quarter, we recognized $37.1 million in service revenues, a $2.9 million increase over the prior quarter. Included in service revenue is 9 million of PacketShaper service and renewals. On a geographic basis, net revenue in North America was $41.7 million representing approximately 38% of total revenue. Net revenue in EMEA and Latin America was $46.3 million, representing approximately 42% of total revenue, and net revenue in the Asia-Pacific region was $21.6 million, representing approximately 20% of total revenue.

Gross margin on a non-GAAP basis increased to 75.1% in fiscal Q3, compared to 76.4% in the prior quarter. The decrease in gross profit is primarily related to higher manufacturing and fixed costs on lower revenue base and a shift in product mix to lower margin products.

On a non-GAAP basis, operating expenses decreased approximately $4.4 million to $68.7 million in the third quarter. At the end of fiscal Q3, we had a 134 sales teams compared to 121 at the end of the prior quarter. On a Non-GAAP basis net income for the quarter was $9.3 million or $0.21 per diluted share and exceeded the high end of our guidance range due to lower operating expenses the fully diluted share count for fiscal Q3 was approximately 43.2 million shares.

Turning to the balance sheet, we ended the quarter with cash, restricted cash, and investments of approximately $111.8 million, representing an increase of $14 million from the prior quarter. Operating cash flow in the quarter was $24 million.

Turning to our guidance for the fourth quarter of fiscal 2009, we currently anticipate net revenue in the range of $112.5 million to $117.5 million. On a non-GAAP basis, EPS is expected to be between $0.18 to $0.24 per diluted share, which assumes a diluted share count of $44 million. For planning purposes we are using a 30% tax rate.

In closing, we believe fiscal Q3 was a good quarter, while it is difficult to predict future in these unprecedented times, we believe Blue Coat is well positioned in the market and offers a compelling value proposition to our customers. Going forward, we intend to capitalize on the opportunities to close - to boost our long-term competitiveness and accelerate our top line growth. Now I’d like to turn the call over to Brian.

Brian NeSmith

Thanks Kevin. Good afternoon and thank you for joining us today to discuss the results of our fiscal 2009 third quarter. Blue Coat had a solid Q3, given the current economic climate and the high degree of uncertainty it’s permeated the market. While 2009 looks to be a challenging year, the markets for application performance monitoring, plan optimization, and secure web gateway technologies, continue to expand even amid sluggish or negative growth across the broader network infrastructure market.

We believe the relative strength of the markets in which we compete combined with our strong value proposition targeting customers that are looking to get more out of their networks continues to drive our business. The key takeaway for today's call, is that we are winning with our vision for the application delivery network. Our vision is tightly aligned with the current trends and network in enterprise IT management, as the network becomes increasingly critical to the effective delivery of business applications and services.

Given a constrained IT spending environment, CIOs and IT departments must regain control of their networks. They must reduce costs even if bandwidth demand continue to escalate and the influx of advance applications expand. They must improve user productivity as users become more distributive and collaborative and they ask protect users and corporate information from a continuously evolving threat landscape.

These IT imperatives align directly to the core strength of Blue Coat. Blue Coat application delivery network infrastructure product provide the visibility, acceleration, and security required to optimize and secure the flow of information to users across the extended enterprise.

Providing visibility to discover, classify and prioritized business critical of application and enables enterprise customers to reduce bandwidth cost and postpone costly network infrastructure upgrades. Accelerating internal, external and real time applications improved user productivity, speeding decision-making and boosting competitiveness. And blocking malware an objectional content for text user and information list expressed. Fiscal Q3 provided strong evidence of our ability to compete and when customer select Blue Coat to reduce cost, improved productivity, and protect user from threats.

Plano Texas base Dr Pepper Snapple Group maker of America's oldest soda selected Blue Coat WAN optimization technologies for corporate wide rollout designed to accelerate the delivery of business applications to users across the distributive network. A Lincolnshire, Illinois, based HR consulting and outsourcing provider selected Blue Coat appliances to gain granular visibility into the obligations running on it’s network and to optimize application delivery by utilizing a packaged shaper products advanced traffic shaping and compression techniques. Fort Worth, Texas, based consumer electronic firm employed Blue Coat ProxySG and proxy client products to cost effectively secure business applications running between its corporate headquarters and 5000 retail stores.

The key Criterion was the Mobile client, which integrates URL filtering and WAN optimization capability. Blue Coat continue to Blue Coat continue to pursue business opportunities together with its strategic services provider partners including AT&T, orange, horizon and BT provide managed security and WAN optimization services to our joint enterprise customers. Q3 included a $1 million strategic managed services win with one of the worlds largest energy companies based in Europe. In Q3 we differentiated our PacketShaper product and delivered a new software release design to extent its already market leading applications classification capability.

Now in addition to classifying more than 600 applications, the PacketShaper product can classify and provide guaranteed levels of service for custom and house applications. We also delivered a new release of intelligent center formally a Packeteer product, which is now Blue Coat branded and offers a richest set of real time FLA monitoring capabilities.

Q3 also marks a significant milestone for Blue Coat as we ascended to the number one position in WAN optimization control of market according to Gardner and maintained our number one position in the secure web gateway by market according to infantis. Both market share and industry recognized technology leadership validates the strength of our product offering and the real value they provides to our customer worldwide.

In closing, we are well positioned to compete and win with our vision for the application delivery networks. Blue Coat offers unmatched visibility into the performance and security of application and web traffic running across the networks of the distributing enterprise.

This provides the comprehensive application, end user control that customers require to reduce cost improve productivity and protect against threats. Our unique focus on Application Delivery Network Solutions we are continue to provide customers with strong ROI and cost savings and drive our revenue during these difficult times and in the better time to come in the future. With that I would like to turn the call back over to Jane.

Jane Underwood

Thanks Brian. That concludes our prepared remarks we will now turn the call over to the operator for questions. Chris?

Operator

Okay, thank you. And ladies and gentlemen (Operator Instructions) And our first question comes from the line of Jonathan Ruykhaver at Thinkequity Partners. Please go ahead.

Jonathan Ruykhaver – ThinkEquity Partners LLC

Hello, nice execution in the tough environment Brian, Kevin. I am curious did you experience any further integration related sales – sales turnover in the quarter?

Kevin Royal

I mean we, I think I guess you are referring to Packeteer. So that we….

Jonathan Ruykhaver – ThinkEquity Partners LLC

Yeah

Kevin Royal

I am speaking generically, yeah we continue to see a bit of turnover there I think its probably not more than we expected at once we went into the acquisition and got a better sense of what was going to happened there we started to respond and adjust to that So as I think probably according to what we expected but we continue to see some turnover there.

Jonathan Ruykhaver – ThinkEquity Partners

I didn’t hear you quantify a number of sales teams at the end of 3Q, could you give that number what the target is for the fiscal year?

Brian M. NeSmith

We finished the end of Q3 with a 134 teams and the target is to get north of 150 teams by the end of this fiscal year.

Jonathan Ruykhaver – ThinkEquity Partners

Okay, so just to clarify again your plan is to continue to hire on the sales and marketing side in the current period.

Brian NeSmith

That is correct.

Jonathan Ruykhaver – ThinkEquity Partners

Okay and I don’t know if you’ll talk about this Brian I don’t think you have in the past, but could you just give any kind of color on monthly bookings across the quarter from a linearity perspective, maybe share order trends month-by-month?

Brian NeSmith

I mean in broad sense I mean normally we highlighted is kind of a 25, 30, 45 type things and from a month-to-month standpoint this particular quarter is a little different. We definitely saw surging in the December period. So that month was a bit stronger than average and generates a bit lower than the average than what we originally expected as far as looking linearity for the quarter. I know Kevin you want to add anything there?

Kevin Royal

No I think that system is with a we saw for the quarter.

Jonathan Ruykhaver – ThinkEquity Partners

Yeah, and looking at the guidance you gave for revenue in the fiscal fourth period you changed any assumptions around closure rates or pipeline activity?

Brian NeSmith

So the pipeline is constantly kept up-to-date by the sales organization and opportunities. So that no change in the methodology there. We did experience a reduce closure rate in Q3 as compared to the Q2 before and the assumptions that we built in for this quarter is that reduced closure rate going into this quarter.

Jonathan Ruykhaver - Thinkequity Partners

So you are maintaining that were was in the third quarter for the fourth quarter.

Unidentified Company Representative

That’s correct John.

Jonathan Ruykhaver - Thinkequity Partners

Okay. And just final question I believe that you have been undertaking that effort within the R&D side to focus on improving either deployment in these abuse when the product is purchased to level the plan feel to some extend with I believe can you elaborate on this at all, when that release might be available.

Unidentified Company Representative

Well we I think as I highlighted in pervious sessions. We have actually made investment all about fiscal year as we in every release that we produce we actually produce incremental improvements and I think as we go forward and continue to see increment of improvement. Have a new release coming out this quarter that also does provide continue to provide incremental improvement and I expect there will be releases after that where we think we can improve the challenges around how our product is solved and we have already made a lot of improvement I actually think it’s a very good right now and I think we moving to a position while I believe we will consider superior to anything in the market as we deliver the next couple of releases.

Jonathan Ruykhaver - Thinkequity Partners

Okay a just clarify that simply a upgrade to a new version of the OS.

Unidentified Company Representative

Yeah just another software version that’s correct.

Jonathan Ruykhaver - Thinkequity Partners

Okay good all right. thanks very much congrats on the performance.

Operator

Thank you, and our next question comes from the line of Erik Suppiger from Signal Hill. Please go ahead.

Erik Suppiger – Signal Hill.

Hi good afternoon. Just on the linearity, can you comment what you saw in the month of January, a couple of other vendors have suggested that January saw a pretty good deterioration from the – that the two months earlier, any comments from you and just a general demand trends in January?

Kevin Royal

If I draw any kind of big conclusion on it. We normally see what the calendar year-end. If you look back at previous years is that December for us tends to be a very strong month on average in January is always a start of the planning career for lot of companies. So, it typically does drop off somewhat and we saw the same thing in this period. I don’t know if I can draw any conclusion out of what we saw in the environment and we – it felt the same as what you know if we look back over the previous three or four months, there are still challenges in closing business when orders are larger and you got to put a lot more effort into understanding what the purchasing process is associated with winning business from customers which we have been putting a lot of energy and tune it, and it didn’t really change that much in January

Erik Suppiger – Signal Hill.

Okay, you brought on a number of sales teams during the course of the quarter was there a much contribution from many of the sales teams that were brought on or was just primary, nearly entirely driven that the revenues nearly, all came from your, existing sales teams?

Kevin Royal

I don’t know the exact number, but it’s a little bit different, than I think our historical look at adding sales teams. And fair number of cases we're putting these sales teams back into territories where we have been generating revenue were generally speaking, historically, we have been adding sales teams into new geographies as a higher percentage. So, I am sure there was some contribution a little bit at exactly when all those people showed up. So, I think we had a fair number of people who didn't show up until January and we had a some December and November as well, but I know they contributed some I just don’t know that number on top of my head. I’m not sure we have that break out right here to give you an detail there.

Erik Suppiger – Signal Hill

How long does it take for a sales team to typically ramp?

Kevin Royal

We have used consistently for the last five years a five-quarter ramp.

Erik Suppiger – Signal Hill

Okay, and North America show a pretty good decline sequentially was there inline with your expectations or it was Europe conversely did reasonably well. Was that inline with your expectations or was there any notable market trends in North America?

Unidentified Company Representative

Only thing that’s a couple of points one is that I am reluctant to it kind of average across the quarters and looked how the revenues going in a particular geography to see how that regions performing and from that standpoint I think the U.S. was fine, we didn’t see in fiscal Q2 the prior quarter we had a strong federal quarter and seasonally, Federal tends to weak in there fiscal Q3. So, there is a little bit of about activity as well.

Erik Suppiger – Signal Hill

Very good. And then finally Kevin for you, are we at a point in the model where with revenue growth, we are going to see pretty good leverage from a operating expense perspective?

Kevin Royal

I think as we have always said here that, we will give one-quarter guidance and, the guidance you got there is from revenue and EPS standpoint as what we’ve got.

Erik Suppiger – Signal Hill

Okay and very good thank you very much.

Operator

Thank you, and the next question comes from the line of Scott Zeller with Needham & Company. Please go ahead.

Scott Zeller – Needham & Company

Thank you, Brian on the previous call, there is a big deal made us and a lot of focus on the number of available sales team for this comp that earlier questions. Do you still believe that, having more feed on the street is going to be critical to conversion in sales or do you believe that anything is changed and your sales teams are converting better than they had previously.

Brian NeSmith

I don’t think the sales teams are converting better. If you look at the close rate measured as a percentage on the pipeline, that deteriorated from Q3 to Q2. So, quite nice we are definitely affected by the challenges in the macroeconomic environment that being said when we look at productivity, and our sales teams leaded by the their tenure here. We saw a little bit of a change, but not one that I would consider material from that productivity standpoint. So, we still believing the reason we’re planning to grow the number of sales team this coming quarter that there is growth opportunity we had and that’s why we are making that investment.

Scott Zeller - Needham & Company

And as regard to the channel, how would say the efforts have gone getting the former Packeteer wars to take on the Blue Coat product set? What sort of efforts is the company putting in there to drive that?

Kevin Royal

I mean, you are asking for a – you need to give you kind of a grade you want to report how that?

Scott Zeller - Needham & Company

Well, is it something that you’re relying on your distributors for or are you actually taking direct efforts with wars in going right to them and prowling them to take on the Blue Coat product set.

Kevin Royal

We work directly with retailers all over the world as well as other partners, business integrators, OEMs, so we don’t, we feel that we have a direct responsibility to do that and put a lot of effort into training and other activity that goes on with that as well we breakdown and understand some standpoint, our retailers who is selling cash paper products, whose Proxy SG and whose selling both and what volumes are they doing at. So we put a lot of energy and continue to educate and train people on both sides. The challenge for us here is actually in both our actions. We have historical Blue Coat resellers that are being trained on the PacketShaper products and on the other side we have PacketShaper resellers as we trained on the Proxy SG producst and it’s not a binary advantage. It’s a gradual effort as you train more and pore people and make them experts. I think we’re are doing a reasonably good job in that area right now. Since the acquisitions we had a very big road show and a lot of WebEx training and done individual training we had partner conferences in several parts of the world. I just recently got back from our partner conference in Asia. And we had over 400 resellers there and one thing I would starting to buy is the number of PacketShaper customers that we’re excited about picking up ProxySG and opportunities in yield sides as they thought there were a lot bigger than PacketShaper that still going to help in close business. I just recently completed myself, which I do after we complete an acquisitions. I have reached to about now 30 of our largest PacketShaper resellers. And mainly, just doing a kind of getting a sense of how that acquisition has gone, what the benefits they have got. And what I was heartened by, we had a few challenges, which I think we can fix in short orders but in general across the board a lot of PacketShaper, resellers, more really coming up learning curve, in spite a little bit and about the richness of functionality with the existing ProxySG and the effort and took to understand that. I think, I would say is generally pretty good. We had some challenges that came to integrating the two organizations together, but from a reseller standpoint I’d give a so pretty good rate.

Scott Zeller – Needham & Company

Since you offered the report card I will just keep going, how would you say amongst the 30 largest PacketShaper resellers, I’m mean what number would say as actively out there with ProxySG of the 30?

Brian NeSmith

Today I think, I saw the report actually it’s roughly about a third of those and probably about another third are well into the leaning process really high performance active.

Scott Zeller – Needham & Company

And how would you compare that to the most – the previous quarter for instance same number?

Brian NeSmith

I think in the previous quarter of the 30 my guess is only 2 or 3 and many of them because we are probably already converting them via Blue Coat retailer prior to the acquisition.

Scott Zeller – Needham & Company

Thanks for the color.

Brian NeSmith

Thanks.

Operator

Thank you and next question comes from the line of Richard Sherman with Mkm Partners. Please go ahead.

Richard Sherman – Mkm Partners

Hi, good afternoon. I had a couple questions one clean Kevin, what was the total headcount at the end of the quarter?

Kevin Royal

The headcount for the end of the quarter was 1355.

Richard Sherman – Mkm Partners

1355, and then maybe could you talk about the drivers on the revenue side, how much of it was securities driven versus WAN app because the numbers are pretty good here on the revenue side?

Kevin Royal

I think it was – it’s fairly the same ratio that what we saw, it’s a little hard to break out because we have a lot of customer buying both. I think even in one of the prepared remarks that we talked about we had a customer that’s buying it both motivated for bandwidth saving as well as for improved security in their infrastructure. One thing that I am excited about and I probably should have brought up at the resellers, we are finding, one particular exciting niche that we saw is PacketShaper was really good in the Citrix environment and giving fine grain control in many ways necessary for Citrix ITA clients form the way they like and to and we found now a couple resellers that are using Proxy SGs as add-on sales in that format that gives fine grain user identity associated with the tracking of what people are doing and they are really excited about selling in basically what was a clear niche for PacketShaper something in that environment

Brian NeSmith

But, in general, I’d say it’s we are getting a lot of good traction there.

Richard Sherman with Mkm Partners

Very good, and then Brian, maybe what about verticals seems to stand up on the upside here this quarter?

Brian M. NeSmith

Think I am trying to think there is any particular vertical. I don’t think there was anything that was especially notable. The surprise to me is that we still do a reasonable amount of business and financial services which is not at normal, but given all the press you would think differently but we still do see some business happening there.

Richard Sherman with Mkm Partners

Okay, and then the dollar impact to Europe, how much do you estimate it impact of your business.

Brian NeSmith

Really that would impact the purchasing power of our European customers, so it's a Richard it’s just very difficult for us to measure. We price all of our deals both in Europe and in Asia-Pacific in U.S. dollars.

Richard Sherman with Mkm Partners

Gotcha, okay, very good. Thank you.

Operator

Thank you. And our next question comes from Ryan Hutchinson with Lazard Capital Markets. Please go ahead

Ryan Hutchinson – Lazard Capital Markets

Good afternoon guys. Nice quarter. So, I guess it sounds like January didn’t go as bad for you as most out there. How is February going for you?

Brian NeSmith

You know as Ryan I know you have to ask and I know you’ll know the answer as we could not comment about things there in this quarter and the guidance that we've outlined to you obviously is given as of today. So I mean we stand by the guidance that we provided, but I don’t think there is anymore flavor we can, we looked at into that.

Ryan Hutchinson – Lazard Capital Markets

All right. Well, let's me maybe jump into the guidance and just get a better understanding of the mechanics between Blue Coat core and Packeteer. It looks like, the Packeteer business on the product size is downed about 14 million historically, they were doing $18 million to $22 million with their eyes closed. I am just trying to get a sense of, if you expect that to recover, and where is the strength coming from? Is it primarily core Blue Coat revenue in terms of how we should think about modeling that?

Kevin Royal

I think for this quarter we’d expect the PacketShaper revenue to be roughly flat. So, I don’t think we would see much of an increase in that area. I am not - part of that is I think attributable to this uncertainty and the channel with the customers that clarity gets better for those customers. I think we’ll see that gradually pick up. That’s getting pressure at the same time from obviously the overall macroeconomic environment. Blue Coat product, the traditional Proxy SG products continue to perform, I think very well. And so I think that, we definitely saw reasonable traction there. I don’t think to be clear, I don’t think it’s going to bounce back immediately to that $20 million for the run rate and as we given guidance for this quarter we expect to stay roughly flat for this quarter.

Ryan Hutchinson – Lazard Capital Markets

Okay and is that a function of just all the stuff that’s been going on in the sales force side and the Blue Coat sales reps getting up speed or just kind of trying to understand where?

Kevin Royal

No, I think it’s that – I think it’s, anytime you do an acquisition that, a number of things can happen and I think that well customers and partners sometimes wonder what’s going to happen, what’s interesting to me is I – I had a number of people compare the acquisitions of net cash product line with the PacketShaper product line. I think all of you know, they were dramatically different sort of situations and in that case we didn't acquire product of Packeteer we did and I think a lot of people drew that parallel, and that's we have a very different strategy with PacketShaper we think it has a tremendous future, it really helps company’s gain great visibilities what's running on their network environment and the announcements that we made with new functionality there and new functionality in the management platform, I think I will help to clarify that. In addition, we have realize that we have to do more targeted lead generation specifically for PacketShaper and we get some of that early on but we didn’t always have that narrow product focus from the lead regeneration standpoint right after the acquisitions and in the last three months we ramped up our activities there to try to fill that pipeline with activity specifically around PacketShaper leads that we are feeding to the channel.

Ryan Hutchinson – Lazard Capital Markets

Okay, and then for Kevin. Going back to the guidance I’m assuming the bulk of the increase comes a sales and marketing as you March towards the 150 teams I guess one is that is that a fair assessment and then two, the gross margin assumption for both product and service is coming down here I’m assume some of it is as you have indicated being more aggressive on pricing and then you got the manufacturing stuff as well but just a some color there in terms of how we should think about modeling that would be helpful and that one final.

Kevin S. Royal

Ryan the last part of your question has to do with gross profit.

Ryan Hutchinson – Lazard Capital Markets

Your gross margin assumptions yeah for both product and service.

Kevin S. Royal

Yeah we expect gross margins to tick up slightly little bit more than half percent Q4 versus Q3 as we have a higher mix of product which is service in the quarter and then your question on OpEx the majority of the spinning increases forecast to be sales and marketing as we add teams, but also we have got, we are going to be in our fourth fiscal quarter and so we will have commission accelerates as well.

Ryan Hutchinson – Lazard Capital Markets

Okay great and then cash flow of 24 million what are your expectations for next quarter and if you could just provide depreciation and amortization in CapEx then I will jump back in the queue for the current quarter?

Kevin S. Royal

Yeah that’s a not a the cash flow is not a guidance number that we typically provide, but given the outlook for revenues and cost and profitability I would say from an operation standpoint we should be fairly consistent quarter-to-quarter.

Ryan Hutchinson – Lazard Capital Markets

Okay, thanks guys.

Operator

Thank you. And our next question comes from the line of Alex Kurtz with Merriman Curhan Ford. Please go ahead.

Alex Kurtz - Merriman Curhan Ford & Co

Yeah, thanks guys. Congratulations on the solid quarter. Brian, could you just talk about deal size in Q3 versus Q2. Any changes there as IT budgets getting further contracted?

Brian NeSmith

I think, there weren't as many larger deals in Q3 that was compared to Q2. And I’m just thinking through to the top 10 customers we have and the averages that we saw there and definitely Q3 they were smaller. So it was definitely larger number of smaller deals. That being said I think if you look over the last three years at our operating history in any one quarter, I’ve seen that same fluctuations. I’m not sure that’s macroeconomic driven and if I, if we look at some of the large deals that we see still on the pipeline and that number hasn’t really shifted that much. So, I’m not sure there is a trend I would withdraw there and that regards although to answer your question, We didn’t see and probably that the larger deals a number of them was less than it was in Q2.

Alex Kurtz – Merriman Curhan Ford & Co

And just the followup to that can you comment budgets are you seeing customers do smaller deals and smaller projects, now then differing things to the back half of calendar ’09? Is that something that you are seeing in your pipeline?

Brian NeSmith

The answer is partly what you’re saying as I think we definitely seeing deferrals. I don’t think, we are seeing any kind of clarity about when that deferrals going to go active. So, I think they are saying we are not going to do it now. And we will look at it later so rather than saying it’s a specific timeframe I would say that were certainly seeing, we are seeing deferrals take place.

Alex Kurtz – Merriman Curhan Ford & Co

And get back to the guidance, you guys are obviously you’re guiding up here, this in your Q4 is this just the effective new sales teams coming online and this has been the end of your fiscal year end that you have the confidence to guide up sequentially.

Brian NeSmith

I mean it’s partly that it’s partly looking at the forecast in our pipeline and the opportunities and assessing what we think we will close as far as how we are doing with business. I mean, the measure is a lot of factors that go into the guidance that we provide and clearly, the number of we have and the capacity to service the business, part of that, but it’s not the only part.

Alex Kurtz – Merriman Curhan Ford & Co

And then finally can you give us a little color on the competitive environment. I know you had - a couple quarters your selling PacketShaper, is it change the dynamic for you or is that still the same vendors and the same, technology that you are competing against? Or has that changed in anyway?

Unidentified Company Representative

I don’t think the vendor profile has shifted. One thing I do believe is that some of our competitors had to respond the PacketShaper specifically just the level of visibility that it provides which interesting is that some of the – some of the challenges, some of our competitor going to have. They have may have the management product they can report on the data, but the question is today have the platform that can collect the data and that that’s the real power of PacketShaper. Visibility enter the 600 plus applications, very exciting process the ability to, that we provide as a toolkit for our customers and to create a classifications for their own home grown application. And so now, our customer using PacketShaper will going to be able to classify their own products. In addition I think the one thing we still feel the PacketShaper is that bandwidth management capability so that IT organizations can exert, control and prioritize and manage traffics of, I think if anything it’s strength, it’s your strengthen our position in application delivery especially longer lines with just greater visibility and to the infrastructure.

Alex Kurtz – Merriman Curhan Ford & Co

Thank you, very much.

Operator

Thank you, and our next question comes from the line of Rohit Chopra with Wedbush Morgan. Please go ahead.

Unidentified Analyst

Hi, guys. This is (inaudible) for Rohit Chopra. I’m wondering if you are seeing any instances of credit issues or customer financing issues with your customers?

Unidentified Company Representative

You asking the question, whether do we see more credit in financing issues this quarter than we did historically?

Unidentified Analyst

Yeah, with the customers. Are customers wanting to do purchases that may not having access to credit or financing?

Unidentified Company Representative

You know I don’t think we had any impact during the quarter related to any customer credit issues, credit lines being exceeded or credit not available.

Unidentified Analyst

Wonderful and then on the international side of the business, it looks like Asia did pretty well this quarter. Could you just run through maybe the international business and what countries made them strong or weak?

Unidentified Company Representative

Given a geography write down. I don’t know if I could right now and go through country-by-country to see what shifted.

Unidentified Analyst

Are there any particular areas of strength?

Unidentified Company Representative

I’m thinking through different countries. That there is anything particular that stood out, probably, the only thing that we saw, we saw a reasonably good business in Australia, New Zealand this year that last quarter, but we saw that strengthening in Q2 as well and I’m just thinking about the other countries and Europe. I think that, I don’t think it was in a specials, I wouldn’t called out but even I hesitate to say even as Australian New Zealand and you know being abnormally strong. I mean it was generally pretty good across the board.

Unidentified Analyst

That’s fair. And then on the partnership front. Do we expect anything in terms of new partnerships, with riverbed, joining that HP broker reliance, do you see any things coming down your way from a partnership perspective?

Unidentified Company Representative

We have, from early part of our history pursued and worked with companies in some cases even companies that are competitors. And so, we have partnerships on the technology side, with flittering vendors and with antivirus vendors and we have partnering relationships with companies that daily protection and do other types of things to help us, we have partnerships with sellers of products and systems integrators and number of different things that we talk about one thing that’s probably we are talking about in particular as we do see a strengthening of relationship with through point within the e-mail security space and as a great product in that area, and finding ourselves working jointly with them and a number of customer environments. And that is a growing relationships, I think that we will get a lot more emphasis as we go forward.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Samuel Wilson with JMP Securities. Please go ahead.

Samuel Wilson – JMP Securities

Thank you, very much. I’m sorry, I missed a couple of things. I apologize, but did you actually give the CapEx number for the quarter.

Kevin Royal

Haven’t given it yet. But CapEx spending in the quarter was 9.3 million

Samuel Wilson – JMP Securities

And then did you give that D&A number?

Kevin Royal

Depreciation and amortization together were 5.9 for the quarter.

Samuel Wilson – JMP Securities

Right and then a question for Brian or Kevin, either one, so Packeteer used to run about $35 to $40 million of revenue all in and I know you closed down some product lines and you’ve done some other things right now it’s running about $23 million in revenue. I’m not asking like this quarter or next quarter, but where do– I mean, do you see it overtime just given the current product set with the revenues drift back up, do you see the 23 plus or minus something sort of the revenue levels? Do you get the question? I’m trying to get a sense for the delta right now. How much of that is economic? How much of that is products you shutdown you’ll never generate revenue from again?

Brian NeSmith

I mean, it’s a good question but the thing have to understand, so that’s the PacketShaper revenue that we’re talking about – as you highlight that does include the other products that were shutdown. We are getting traction, there were number of eye shaper customers which was a product that was discontinued that were either customers are around the pipeline of customers for Packeteer and we did turn the fair number of those customers and to ADN customers who look out. And so some of our even our product revenue on Proxy SG side, I think it would equate the PacketShaper revenue. We don’t calculate that, that amount and it’s a little bit difficult to give it exact reference. But the answer you question the guidance we gave for this quarter on PacketShaper was we expect it to be flat and I think overtime we’ll see a gradually improved backup again. I don’t think it’s going to get back up to the historical run rates but it would just kind PacketShaper that Packeteer was operating at.

Samuel Wilson – JMP Securities

So PacketShaper itself is more good news about any given quarter $25 million to $30 million apples-to-apples, that's the kind of number you would see get back to eventually.

Brian NeSmith

That’s correct, if you cancel service end products I think that we would expect that probably be back in that range.

Samuel Wilson - JMP Securities

Got it, perfect. And then my other question for you is that, you mentioned close rate to drop and I just wanted to get sort of a qualitative comment about bake off in RFP activity. Do you notice that lets say compared to year ago our bake offs in RFP activity down for you substantially about the same of just sort of a sense?

Brian NeSmith

I would say it’s probably closer to flat, maybe a little bit up compared to a year ago.

Samuel Wilson - JMP Securities

Perfect. Thank you very much.

Kevin Royal

Yep

Operator

And I have no further questions in queue. Please continue.

Jane Underwood

Okay again, and we’d like to thank you for joining us on today's call. A replay will be made available at 800-475-6701, beginning at February 26, 2009 at 7:00 p.m. Eastern Time. An audio archive will also be available on our website. Have a great day and we look forward to speaking to you again soon. Thank you.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thanks for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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