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Riverbed Technology, Inc. (NASDAQ:RVBD)

Q1 2009 Earnings Call

April 23, 2009 5:00 PM ET

Executives

Renee Lyall - Director, Investor Relations

Jerry M. Kennelly - Chairman and Chief Executive Officer

Randy S. Gottfried - Chief Financial Officer

Eric Wolford - Senior Vice President, Marketing and Business Development

Analysts

Troy D. Jensen - Piper Jaffray

Samuel Wilson - JMP Securities

Steven Freitas - BMO Capital Market

John Marchetti - Cowen and Company

Alex Kurtz - Merriman, Curhan, Ford

Rohit N. Chopra - Wedbush Morgan Securities Inc.

Shubho Ghosh - Thomas Weisel Partners

Munjal Shah - Jefferies & Co.

Operator

Good afternoon, my name is Lisa and I'll be your conference operator today. At this time, I'd like to welcome everyone to the First Quarter Fiscal Year 2009 Financial Results Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Renee Lyall, Director of Investor Relations. Ma'am, you may begin your conference.

Renee Lyall

Thank you, Lisa. Good afternoon and thank you for joining us on today's conference call to discuss Riverbed's first quarter fiscal year 2009 results. I am Renee Lyall, Riverbed's Director of Investor Relations.

Joining me on the call today are Jerry Kennelly, Riverbed's President and CEO, Randy Gottfried, Riverbed's Chief Financial Officer and Eric Wolford, Riverbed's Senior Vice President of Marketing and Business Development.

Before we begin, let me cover some administrative items. A press release detailing our first quarter financial results was distributed today at 1.05 PM Pacific Time via Business Wire. The press release is available on our website at riverbed.com.

This conference call is being website live via the Internet at riverbed.com/investor and will be archived on our website for the next 12 months. The information we present and discuss today will include forward-looking statements including, without limitation, statements about Riverbed's financial results, business, financial outlook and stock repurchase program.

These forward-looking statements are only predictions and involve risks and uncertainties, such that actual results may vary significantly. These risks are set forth in detail in our Form 10-K for the fiscal year ended December 31, 2008. These forward-looking statements reflect belief, estimate and predictions as of the date of this call. Riverbed disclaims any obligation to update any forward-looking statements.

Certain financial information that we review on today's conference call is presented on a non-GAAP basis. The non-GAAP results exclude certain items to provide what Riverbed believes is a more complete understanding of our underlying operational results and trends. Non-GAAP revenue excludes the effect of purchase accounting adjustments representing the fair value of Mazu Networks deferred services revenue.

Non-GAAP net income also excludes the impact of stock-based compensation, stock-based payroll expenses, amortization of acquired and intangible assets; acquisition related expenses and related income tax effects.

Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for, or superior to, GAAP results. The most directly comparable GAAP information, reasons why management uses non-GAAP information and a reconciliation between non-GAAP and GAAP figures is provided in our Q1 2009 press release which has been furnished with the SEC on Form 8-K today.

We will also refer to certain non-GAAP financial measures on today's call that will not reconcile two comparable GAAP measures in today's press release. We have posted a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on the Investor Relations portion of our website.

On this call, Riverbed will provide guidance using non-GAAP financial measures. We have not reconciled the forward-looking non-GAAP guidance that we will discuss today to comparable GAAP guidance because we cannot readily estimate the impact of our future stock price or on our future stock-based compensation expenses. Any future product feature or related specification that may be referenced in today's call are for informational purposes only and are not commitment to deliver any technology or enhancement. Riverbed reserves the right to modify future product plans at anytime.

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

Jerry M. Kennelly

Thank you, Renee. Welcome everyone and thank you for joining us this afternoon. And what can only be described as a very challenging economic environment, Riverbed delivered standout results.

On a non-GAAP basis, revenue grew 21% year-over-year to $88.5 million. Operating profit increased 33% over the same period of last year and net income increased 17%. We generated $27 million of cash from operations and our balance sheet boasts $250 million in cash and marketable securities and no debt. Our results this quarter provide an answer to those who question if WAN optimization is a must have technology.

Our products improve the overall performance of the IT infrastructure and they help customers derive more value from the IT investments they already have in place. This is Riverbed's core value proposition and combined with a strong return on investment and short payback period associated with the deployment of our products, it is the best methods to be selling in this environment.

In the first quarter, we had some significant customer additions, including a key U.S. military organization; one of the world's top 10 Forbes Global 100 companies; two of the biggest global insurance companies and a leading media company with annual revenues in the tens of billions. With these and other additions, including acquired customers, we now count 54 of the Forbes Global 100 and 175 of the Fortune 500 as Riverbed customers.

During the first quarter, we continue to execute our strategy to drive growth closing our acquisition of Mazu Networks. The Mazu products have joined the Steelhead family of products under the name Cascade and are being sold by our channel partners worldwide.

The sales teams have been trained and are working together in the field. Cascade and Steelhead products are highly complementary and when deployed together allow Riverbed to become an even more strategic vendor to our customers.

Depositary Trust and Credit Corporation or DTCC is a great example of our customer already benefited from both Cascade and Steelhead technologies.

Cascade provides our IT team with data analytics regarding the tough traffic patterns which help them identify opportunities for optimization to their deployed Steelhead appliances. We believe this example would be one of many as other companies come to realize the advantages of jointly deploying Cascade and Steelhead products.

Now let me update you on some of our growth initiatives. First, one of our strongest growth levers is to expand our distribution. We've made significant progress to-date with bookings to our service providers and systems integrators increasing almost 200% year-over-year and representing about a third of our business during the first quarter.

We're also seeing increased interest by our service provider partners in WAN optimization and application specific analysis as they manage service to their customers. Our investments in our value added reseller, system integrator and service provider partners are generating positive results that are instrumental to driving growth.

We recently announced enhancements to our Riverbed partner program including market development funds and additional investment to train for all of our channel partners. In addition, the efforts to further increase demand and boost market awareness of our Riverbed solutions. This would be a key focus for us in 2009.

Second, we continue to differentiate ourselves competitively and add value to our customers' investments in the Steelhead products through our Riverbed Services Platform or RSP.

During the first quarter, we announced an OEM agreement with Microsoft for Windows Server 2008. Through this agreement, Riverbed customers are able to further centralize their IT and data center and consolidate their remote offices by running the most common IT platform, Windows Server on their Steelhead appliances. Microsoft becomes the sixth Riverbed Technology alliance partner with the qualified solution running on RSP.

We also have customers running their own custom software modules on the platform. RSP does not generate meaningful revenue as a standalone product but it drives incremental business to Riverbed and further solidifies our position as a key platform for CIOs in their IT infrastructure.

Third, we expand our market opportunities through our successful qualification with EMCs, SRDF/A products for disaster recovery during the first quarter. A recently published storage magazine survey of more than 700 organizations found that storage administrators expect to spend more money on the WAN for disaster recovery in 2009. In a related article, an ASG analyst stated that more companies are leveraging WAN optimization for disaster recovery.

As a result of our qualification with EMC, we're currently engaged in new sales opportunities in which Riverbed would not have been included before. Our core value proposition resonated very strongly in the business continuity and disaster recovery market where massive amounts of data are copied from data center to data center over the WAN area network.

In many instances, not only do our products accelerate replications but they also help customers avoid bandwidth upgrades. One customer, an international law firm, achieved both data consolidation and improved replication by deploying Steelhead appliances. Focusing on just the SRDF/A solution, the firm was able to realize significant data reduction of approximately 5 to 1 for the Steelhead's and avoided costly bandwidth upgrade.

We are pursuing qualifications with other storage vendors and look forward to updating you regarding our traction in this important new market for Riverbed.

Finally during Q1, HP ProCurve announced its Open Network Ecosystem, ProCurve ONE with Riverbed as the only WAN optimization provider. As you know, Steelhead appliances and ProCurve switches can be sold as a combined solution today by any joint seller of HP ProCurve and Riverbed products.

We've been actively engaged in appropriate launch advances around the world. We will be demonstrating the fully integrated VoIP solution enter up in May and we remain on track to deliver this solution to the market before the year-end.

With that, let me turn the call over to Randy to go through the financials.

Randy S. Gottfried

Thanks Jerry. As a remainder I must state it otherwise the numbers I'll discuss today are non-GAAP and represent the results of the combined company. We closed the acquisition of Mazu Networks on February 19th and Mazu contributed both revenue and cost to the first quarter. We're very happy with our performance in Q1; total revenue increased 21% year-over-year to $88.5 million; product revenue grow 5% year-over-year to $60.5 million.

First quarter service revenue was $28.1 million compared to $15.3 million one year ago. The majority of our service revenue comes from support contracts, services revenue benefited from our increasing customer base and we continue to improve our support renewal process. Looking forward, we expect service revenue growth to moderate. Mazu contribute about $1 million to the top line in Q1 with the majority in services.

Turning to distribution, 91% of our revenue came from the indirect channels with the remaining 9% coming from direct sales. Geographically, the U.S. represented 55% of total revenue, EMEA contributed 28% and rest of world was 17%. Our revenue stream continues to be diversified with no customers or channel partners representing 10% or more of revenue.

Looking at the revenue by vertical we typically six to seven verticals contribute 10% plus or minus to product revenue and six to seven verticals that contribute about 5%. Q1 was no different. Government, manufacturing, financial and technology were the largest verticals each contributing more than 10% of product revenue with government in the mid-teens in the quarter.

Let me shift over to the cost and expense side. Product gross margin was 76.9% in Q1, down somewhat from the fourth quarter. Services gross margin came in at 73.3% increasing sequentially, combined our gross margin with 75.7% about flat to the prior quarter. We exited March at 939 employees with 62 employees joining us from Mazu.

Sales and marketing and R&D expenses increased sequentially in absolute dollars primarily due to the addition of the Mazu employees. G&A expenses decreased quarter-over-quarter in absolute dollars. Excluding Mazu, sales and marketing and total operating expenses declined Q4 to Q1 mainly from reduced sales commissions which are typically highest at the end of the year.

Our operating margin was 15% this quarter, up from 14% one year ago. Other income fell to 638,000 as maturing items in our cash portfolio have been reinvested at much lower interest rates.

The tax rate for the fourth quarter was 35%. Net income was $9.2 million or $0.13 per share up from net income of $7.9 million or $0.11 per share in the Q1 of last year.

Let me talk, briefly about a few GAAP items. We generated a GAAP profit $974,000 or $0.01 per share. GAAP results included number of entries related to our acquisition of Mazu. Under new accounting or acquisition accounting rules that went into effect this year there may be some meaningful expense fluctuations up or down in our GAAP results over the next 12 months driven primarily by the earn-out component of the Mazu acquisition. We'll provide additional disclosure in our 10-Q filing for the March quarter.

GAAP net income was positively impacted by a $2.4 million tax benefit. We expect our GAAP tax rate to be higher than 100% for the remainder of 2009, largely driven by the tax accounting treatment of acquisition related items.

Moving to the balance sheet. Riverbed ended the March quarter with cash, cash equivalence and marketable securities at $258.2 million and we continue to have no debt. During the first quarter, we purchased approximately 952,000 shares or $10 million of Riverbed stock under our buyback program at an average price of $10.52 per share. We have $40 million remaining under the program. We also paid $23 million of cash plus the assumption of certain liabilities for the acquisition of Mazu in February.

Cash flow from operations was $27.1 million. Accounts receivable, day sales outstanding were 44 days below our targeted 50 to 60 day range. Despite challenging credit market, our collections remained strong.

Inventory totaled $8.7 million at March 31st.

As part of the Mazu acquisition, we added approximately $12 million of goodwill and $24 million of intangibles to the balance sheet. Most intangibles will be amortized over next five years.

Total deferred revenue was $64.5 million, an increase of 11% over the December 31st balance. The majority of our deferred revenue was derived from maintenance and support contracts.

Turning to our forward outlook, while Riverbed's performance in the first quarter was very solid, the global economy remains weak and unpredictable. Given limited visibility we'll be providing former guidance for our second quarter only. All the numbers I'm going to discuss are non-GAAP.

e expect second quarter revenue to be in a range of $92 to $94 million growing 4% to 6% sequentially and 13% to 15% over prior year. We expect our gross margin to be flat up slightly from Q1. We expect operating expenses between $55 and $57 million up somewhat sequentially reflecting a full quarter of Mazu expenses. We expect the tax rate of 35%. We're forecasting earnings of approximately $0.14 per share based on 71 million diluted shares outstanding.

Looking beyond the second quarter, we'll prudently add resources to ensure we continue to provide top quality support to our growing customer base and to fuel future revenue growth. Our general approach and aim is to grow revenue faster then expenses.

I'll now turn the call back over to Jerry.

Jerry M. Kennelly

Thank you Randy. In a short period Riverbed has evolved as the IT infrastructure performance company who's industry leading WAN optimization solution give organizations an order of magnitude increase in the performance of their existing network application and storage systems. Our product sub CIO will save money and reduce costs without sacrificing IT strategy. Our ability to deliver that kind of value is valued more than 6000 companies had choose Riverbed and while Riverbed is the advanced WAN optimization controller market share leader.

With that said Eric, Renee and I would now be happy to answer any questions you may have.

Operator Lisa, we'll now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Troy Jensen with Piper Jaffray.

Troy Jensen - Piper Jaffray

Congrats on the nice quarter John.

Jerry Kennelly

Thanks Troy.

Troy Jensen - Piper Jaffray

Hey Jerry may be a quickly just to you mentioned on this HP Ecosystem. I know HP has historically been a legacy reseller OEM partner it may not have pander like you thought but what's different today then the prior relationship with the HP?

Jerry Kennelly

Sure. So, HP has so from the last 18 months we've been selling with HP through their services group or just service systems integration group. A lot in Europe, some in Asia and to lesser extent in the U.S. HP is now is a giant and they have a new division that is kind of box of light have probably called ProCurve which has networking offering primarily a switching offering that's very competitive to the competition out there.

And they have a funding initiative to sort of take under big guys who really use the HP brand name. Their technology and their cost advantage to take down market share in the networking world. They want to offer the customers reflection of best and breed features beyond their own products and so they put together a consortium of best to breed companies and they've chose the Riverbed to be the WAN optimization seller in that product.

So, it's one of the channel that HP that is new for us it'll be new this year and we hope to take some expansion with it. We will continue sell through the HP channels particularly EES which has been just a tremendous systems integrated a channel for us and attack the market on several fronts with HP as our partner.

Troy Jensen - Piper Jaffray

And then on the Mazu acquisition can you just give is an update on how you think the integration is going and may be what other risk are there any to any stumbles with the integrate WAN technology?

Jerry Kennelly

You actually you see its gone fairly smoothly; it's a great exercise for us. We're benefited by the profile of the product, the characteristics of the employees and the culture of the company Mazu was very close to Riverbed's own profile. It's also easier when a 900% company is integrated in a 60% company.

So the product synergy with our sales reps here attraction to the customer base seems very strong. We actually introduced the acquisition the week for our sales kick-off meeting here in San Francisco in January it was held it all about. So, actually we feel pretty good about it; its just everyone has the same issue in 2009 which is driving sales of particularly of newer products in a tough economy. But right now I feel good about the whole deal.

Troy Jensen - Piper Jaffray

And I assume you should keep up the good work guys.

Jerry Kennelly

Thanks, Troy.

Operator

Our next question will come from the line of Samuel Wilson with JMP Securities.

Samuel Wilson - JMP Securities

Hi, good afternoon. Just a couple of small questions for you and mostly for Jerry. On the partnership side with EMC, HP and Microsoft, do you really in mostly a selling partnerships or is there alone or isn't they in the roadmap for technology development with these companies?

Jerry Kennelly

It's mostly co-marketing, co-selling.

Randy Gottfried

Some reselling.

Jerry Kennelly

And reselling opportunities. We intend to make our technology widely available and don't want to be a captive of any one partner, because we want to be the universal underlying layer 427 (ph) optimization, the technology for the whole world, so, but it really they way we told Riverbed is a product rich distribution constrain company. So getting this extra distribution and brand value on these kind of partners is very important for us.

The truth is over 90% of our sales are made through partners with channel company, a lot of those are very big companies with great brand names HP, EDS and when we lock in the door we're walking hand-in-hand with big name people who have established relationships with the customers.

So we're actually on more of an equal footing in the sales process big customers and people realize that it is not little Riverbed out there, it's Riverbed with big name, big important partners who are respected by the largest companies in the world.

Samuel Wilson - JMP Securities

Got it, okay. Second, during the past you said originally you would sort of add resources in front of revenue and then the last couple of quarters ago would add revenues, sorry add resource in line with revenues. Is that a couple of good quarters there or what's your thought process today on where you add resources vis-à-vis revenues?

Jerry Kennelly

We're still sort of in that mind set added with revenues. But the truth is we have positive real growth in 2009, unlike many people right now, and so my belief is we will have positive real growth for the entire balance of 2009. You can't grow without adding some people or just because of center for and prophecies (ph). So we're cautious, we're conservative but we do intend to grow, we are demonstrating real growth and we will add head count, particularly support as that more people come here in the install base you have to be able to answer the calls and then selectively, importantly in the sales organization, particularly in the channel distribution part of the company.

Samuel Wilson - JMP Securities

Okay. And then lastly the ability to really soft one, you want to give us some sort of an update on what the competitive landscape looks like?

Jerry Kennelly

Eric, we would be devastated if I took that from him.

Eric Wolford

Thank you, Sam. Not a lot has changed so I'm afraid I'm a broken record. The competitive environment looks the same even the Cisco is the main competitor. Juniper and Blue Coat are about the same and a good distance behind Cisco in terms of frequency of who we see. And we continue to win nine out of 10 times.

Samuel Wilson - JMP Securities

Can I ask you one follow-up on Cisco? Why the talk about the new software ads and new boxes and roadmap discussions and blah, blah, blah, blah, blah. Have you noticed any fundamental change when you go head to head with them over the last three to six months?

Eric Wolford

Yeah, sure. Now we've heard all about our release that one time it was called Davis that became 4.1 and so we've heard about it for a long time. We've competed with it for a long time. And all I can tell you is that in the statistics that we've tracked from the very beginning, there hasn't been any meaningful or material change with those introductions. We continue to see the same type of boomerang activities that we saw in the past. We continue to see the same type of win rates and we continue to see Cisco the most. So it is competitive; there hasn't been a material change.

Jerry Kennelly

And anecdotally I'll just add when I go out and visit really big Fortune 100 size companies, you walk in and there is -- I am used to it in the past having to spend the first 10 minutes explaining why we beat them and now I walk in the first minute they say no, no, we know Riverbed is the best, let's just get on with the discussion. So, that sort of intense comparison type thing is trying to fade a bit in the market. Our superiority and leadership is just becoming sort of taken for granted even with the biggest companies.

Samuel Wilson - JMP Securities

All right. Thank you very much and congratulations on a good quarter.

Jerry Kennelly

Thank you.

Operator

Our next question will come from the line of Steven Freitas with BMO Capital Market.

Steven Freitas - BMO Capital Market

Hi good afternoon and nicely done again this quarter.

Jerry Kennelly

Thank you.

Steven Freitas - BMO Capital Market

I know you provided some specificity regarding managed services and SIS be that kind on a combined basis I'm wondering as it relates managed services specifically. Can you talk a little bit about the progress you've seen there and may be any kind of growth as it relates to or compares to the core business and we're seeing like in this environment, that sort of model is tailor fit for enterprise budgets?

Eric Wolford

Yeah there is no question that through our service provider partnerships are growing they're growing fast and year-over-year and growing significantly. So, I think your hypothesis is correct. We do have success there with systems integrator as well. Just like with service providers but definitely they are growing faster and are becoming an increasingly big portion of our revenue quarter-by-quarter.

Steven Freitas - BMO Capital Market

Okay, that's good to know. And then I guess secondly this is based upon factors pretty interesting with HP and it would at the best of my knowledge Cisco is the only one that offers both in appliance and in a blade foam factor. I am just wondering if you have any insight as to how successful the blade foam factor has been for Cisco or is for them is the appliance foam factor, more popular?

Eric Wolford

Well, I can there's our experience and there's the action they have taken recently. Our experience is that the blade foam factor hasn't quite have the impact that it was anticipated that it would have there are technical challenges lots of them with it. And then I can tell you that Cisco recently brought in some new lower end appliances that seem to come and at price points that are at or below their blade products which suggest to me that they have seen all sort of standalone on appliance foam factor has advantages that segments of the market -- large segments of market prefer.

Jerry Kennelly

But what's hard to sort to is the blade versus boxer, or is it the quality of the product that counts. We think a high quality product are Riverbed exorbitant on a blade could sell extremely successfully and might be much more successful for HP than it has been for some of our other competitors.

Steven Freitas - BMO Capital Market

Okay, thanks. And then finally Randy, the cash flow performance was really strong this quarter, payable days and DSOs seemed to drive that significantly. I'm just wondering in the near term, is that sort of DSO level sustainable?

Randy Gottfried

We've said for sometime I think the longer term target of 50 to 60 days makes more sense. We have had some very good execution on the collection side which got a stand in 44 days but long-term I do think that number creeps up a little bit as international becomes a bigger portion of our business which we think it will that adds to a little bit attention more towards the 50 to 60 day range.

Steven Freitas - BMO Capital Market

That's all from me. Thank you.

Jerry Kennelly

Thank you. There is some really good collectors. I must say.

Operator

And our next question comes from the line of John Marchetti with Cowen and Company.

John Marchetti - Cowen and Company

Thanks. Good afternoon guys, just a quick question you mentioned last quarter when you first talked about the EMC qualification that you had about 30 or 40 deals out there, that was kind of just waiting in the wings to get this qualification done. I am just curious if those or any of those 30 or 40 came through in this quarter or if that's still on the table for forward quarters?

Eric Wolford

Yeah sure, this is Eric. The funnel as a result of the EMC certification or qualification announcement our funnel definitely continues to grow. I think, Jerry pointed out even in his script one particularly example of a customer who chose Riverbed with the SRDF/A implementation. So it's early, its happening we're your addressing new opportunities and it's a good thing for us.

John Marchetti - Cowen and Company

Sure. And then you mentioned -- you just kind of went through the competitive landscape having not really change to be? Have you seen anything on the pricing side in terms of either competition trying to get more aggressively you mentioned Cisco with some of the new rolling boxes? But if you have seen anything in terms of a change in pricing out there given the economic back drop is still pretty tough?

Eric Wolford

Yeah, candidly; yeah we have seen many of our competitors going, pulling the price lever and we compete with that. We said this before that in the past we have had to compete with companies like Cisco and deals where they're going down to 80% off and in some cases even free bundling it in with the router and still we're able to compete because ultimately you got to get the value out of the project. So it's got to all work, and so there is some trace there.

Jerry Kennelly

That said that from Eric's comment, what we see in our own pricing stats, the trends really haven't changed very much.

John Marchetti - Cowen and Company

Okay, okay.

Jerry Kennelly

That's correct.

John Marchetti - Cowen and Company

And then is there is any sort of color or commentary that you guys would be willing to share in terms of any difference and linearity in the quarter versus may be some prior quarters?

Jerry Kennelly

The linearity was similar to our historical norms.

John Marchetti - Cowen and Company

Okay, okay. And then lastly any update on the Steelhead mobile?

Eric Wolford

Yeah, Steelhead mobile continues along, it's about 3% of product revenue which is about flat to where it has been. It's a critical part of our competitive differentiation especially on larger deals, but in all deals it seems to be a factor of conversation and I think its in now and purchased by about 19% of our customer base.

John Marchetti - Cowen and Company

Great. Thanks for the update.

Operator

And our next question will come from the line of Alex Kurtz with Merriman Curhan Ford.

Alex Kurtz - Merriman, Curhan, Ford

Yeah thanks and a great quarter guys. So just Randy real quick on some housekeeping items, can you share with us the percent of product revenues from existing customers and how many net new customers you guys added this quarter?

Randy Gottfried

Sure. We -- so we finished last quarter with about 5500 customers, this quarter we finished with over 6000. The percentage of revenue coming from existing customers was about 68% in Q1 versus about 32% for new customers. In general we continued to add new customers at a rapid rate. As just as such expectation, as we get larger we get a larger install based, quite logically you got a bigger percentage of revenue from install base.

Alex Kurtz - Merriman, Curhan, Ford

Okay. And Jerry can you just give us a little more color on the demand picture out there I mean a lot of tech companies talking about how this quarter was back end loaded. It seemed like your linearity was actually pretty good this quarter. What's going on for Riverbed specifically in the market, can you give us a view into that?

Jerry Kennelly

Yeah. So, its gets to the back with a certain amount of competition but I'd say in April, looking forward with our guidance we feel, somewhat better than we've felt in January. I would say it looks sunny out there but I mean we see breaks in clouds as a one way to look at it. When you look at what tech companies sell basically it comes under the two things; you're either selling capacity to people to run their business or you're selling them efficiency.

We benefit them, we saw efficiency in all way. The people are setting departments for the guys who are just selling capacities, people aren't buying who don't need capacity right now they've got it. But everyone still wants efficiency. They still want a wide and that's our advantage to be able to keep going with positive real growth in 2009.

Alex Kurtz - Merriman, Curhan, Ford

And when you look at your consumer segments the larger enterprise excuse me versus mid-market. Any changes this quarter versus last quarter or you seeing enterprise slowdown a bit and mid-market picking up or so how does that look on quarter-over-quarter?

Jerry Kennelly

I am sure we've characterized that in the past. No dramatic change as what I would say.

Alex Kurtz - Merriman, Curhan, Ford

Okay. And last question on as new network application modeling type tools, how does that that demand profile look like a the market right now versus the real ROI kind of WAN of on solution that you guys have always provided. Are you getting any feedback or any pushback from the customers, looking at the WAN of product versus looking at the performance monitoring tool or people coming back saying yeah we want both, what's the sense your guys are getting from that?

Eric Wolford

Yeah sure this is Eric. Of course you get a mix but you definitely have customers who have problems and they know they have problems and so they are looking for cure to their problems and they need to figure what's wrong. So they need something help them profile and detect and figure out where the problem is and that there seems to be a decent market for helping people do that -- diagnose the problem.

There also does seems to be a market for people to justify further ROI right so they deployed in 10% but in order to deploy and a larger percent of their remote size they need a tool to help them build the business case and justify internally to do that. And so we're finding a good amount of traction of interest let me just say of interest and our customer base for doing that, so those are two things that we're clearly seeing.

Alex Kurtz - Merriman, Curhan, Ford

Okay, thank you.

Eric Wolford

Yeah.

Operator

Our next question will come from the line of Ken Muth with Robert Baird.

Unidentified Analyst

Bane Stokhof (ph) for Ken. It looks like there was some incremental strength in the rest of world geography that was up pretty nicely sequentially and U.S economy are down. Can you elaborate may be on what you saw there?

Jerry Kennelly

Yeah, so for rest of world is primarily Asia Pacific and it's a small region and for those reasons sometimes they can be a little lumpy I guess that you might say. But specifically we had a really nice transaction with one of our giant systems integrators in Australia, frankly that brought those guys up and gave them really strong quarter.

Unidentified Analyst

Okay. And I know that region is the majority of Australia and New Zealand. How aggressively are you pursuing some of the other markets in Asia and what do you need to do there to really crack those markets?

Jerry Kennelly

Yeah, so we have investment, good size investment in China with four offices there, and in Tokyo we have just actually brought in, I think we did a public announcement of new Sales VPs or Directors in both markets, Japan and China to push that along. We did pretty well actually in Southeast Asia, Singapore, Malaysia, Philippines, Thailand, Indonesia, but the other big market is India, which has been sort of so, so for us but we're focused on the entire region and have big hopes for the long term.

Unidentified Analyst

Okay. And then just one more, Randy, the comment on expecting the service and support moderate; I just want to make sure I understand all the factors going into that and I am not missing anything. Can you just elaborate on kind of the different factors contributing to that?

Randy Gottfried

Sure. So in general we've seen some really nice growth out of services and support, that's largely driven by simply we have a larger install base who are on support contract so you get natural growth there.

The past -- let's say, certainly in Q1 last quarter we in addition, benefited from just better execution on just the sales renewals front. Our renewals rates have always been high; we're improving the timeliness of those renewals. And so as we've gotten into a better process and closer to our longer-term target there, we won't necessarily see that increase be as extreme as we've probably seen in the last couple of quarters.

Unidentified Analyst

Okay, thanks.

Jerry Kennelly

Thank you.

Operator

And now our next question will come from the line of Rohit Chopra with Wedbush Morgan.

Rohit Chopra - Wedbush Morgan Securities Inc.

Yeah, again, it's Ro, I have three questions for you.

Jerry Kennelly

Sure.

Rohit Chopra - Wedbush Morgan Securities Inc.

You still seeing deals flip and are they if they're getting worse or they're getting better sequentially?

Jerry Kennelly

Is that question number one or is that...

Rohit Chopra - Wedbush Morgan Securities Inc.

Yeah, that's question number one. Very easy one, don't worry.

Jerry Kennelly

Yeah, yeah, so there are deals that been and they're flip from quarter-to-quarter nothing extreme; I guess the most outstanding observation I would make is here one was frankly how kind of normal though which is interesting in this environment but no big shifts or anything. Yes, some slip out some slip in but very sort of running the mill for us.

Rohit Chopra - Wedbush Morgan Securities Inc.

Okay. And deal sizes roughly the same or any changes there?

Jerry Kennelly

No big change.

Rohit Chopra - Wedbush Morgan Securities Inc.

Okay. And can you add a little bit of color to the business environment, you mentioned a whole bunch of geographies but could you, may be I don't know, if there're some countries that are getting worse, some that are getting better; is there anything that you're seeing out there?

Jerry Kennelly

Yeah, it seems like the U.S. feels slightly better; we have to see that. There's more variation in Europe. I think as Northern Europe seems to be stronger; Central, Southern Europe seems to be weaker; but still okay but not as robust as we would like. It's really sort of a month-to-month proposition at the moment but taken in total with the pipeline we have and the visibility, we feel good about the guidance we've given.

Rohit Chopra - Wedbush Morgan Securities Inc.

Okay. And then the last question I had was are you seeing people trade down in your own product portfolio, given you talked a little bit about discounting but I want to see if people are moving down to a different product set given the austerity measures that they may be under?

Eric Wolford

Sure. Yeah, so I mean you see a mix of behavior; projects that are already in motion where they were already funded and there is a solid ROI behind them so people are -- there is not a lot of changes there. I would say on observation might be that initial deal sizes, the first bite might be a little bit smaller than it once was.

And so may be we feel bad a little bit, but in the end you have to have whatever office you're going into if you want to provide the efficiency, that Jerry was describing, to that office you must put in a box that has the capacity to support that demand. So you have to choose either to do the opposite or don't do the office.

Rohit Chopra - Wedbush Morgan Securities Inc.

I appreciate that, thanks guys.

Jerry Kennelly

Thanks Rohit.

Operator

And our next question will come from the line Shubho Ghosh with Thomas Weisel Partners.

Shubho Ghosh - Thomas Weisel Partners

Shubho here for Hasan Imam. First of all guys congratulations on a great quarter.

Jerry Kennelly

Thank you.

Shubho Ghosh - Thomas Weisel Partners

Question was on Mazu, what is the revenue top line impact on Mazu for Q2 and for the rest of '09? And I have a follow up.

Randy Gottfried

Sure, for Q2, we're assuming more than $3 million; we just phrase it like that like that for Q2 as part of our numbers. We're not really giving guidance beyond the second quarter right now.

Shubho Ghosh - Thomas Weisel Partners

Got it. One question on ASPs and if you are seeing any kind of anything out there in terms of ASP pressure given product revenues or I mean down as a percentage of the whole. But your overall gross margin seem to be fairly flattish?

Randy Gottfried

Yeah, so again the pricing trends have not changed that much. The biggest contributor frankly in the change in our gross margin was really a little bit of a shift in our product mix which had a result where people who have been on a whole series of models called this 20 series.

We have shifted everybody over the last six months to selling primarily 50 series of gears the new 50 series of gear actually had a better margin profile, so we did take some incremental actually inventory reserves in the first quarter probably about $1 million more than Q4 that contributed to the margin decline. Absent that reserve increased gross margins would have been probably up a little bit.

Shubho Ghosh - Thomas Weisel Partners

Great, thank you.

Operator

And our next question will come from the line of Bill Choi with Jefferies.

Munjal Shah - Jefferies & Co.

Hey guys this is Munjal for Bill. A couple of questions, one, has your expectation for Mazu changed since you acquired them and now you have them for a little over two months now, almost two months?

Jerry Kennelly

No, it hasn't.

Munjal Shah - Jefferies & Co.

Okay. And in terms of pipeline and conversion ratio, did you see anything abnormal in Q1 in terms of trying to convert the pipeline, better...

Jerry Kennelly

It was extremely normal actually and in fact we did our job, the pipeline has increased somewhat since the end of Q1.

Munjal Shah - Jefferies & Co.

Okay. And any comment on the three weeks of April?

Jerry Kennelly

No. Our experience quarter today is all embedded in our guidance.

Munjal Shah - Jefferies & Co.

Thanks guys. Good luck

Jerry Kennelly

Thank you.

Operator

And our last question comes from the line Sanjiv Wadhwani with Stifel and Nicholas.

Unidentified Analyst

Hey guys, this is Deepak for Sanjiv. I have to hop on the call late so I wasn't sure, did anyone ask about the Atlas project or did you already given update on that?

Jerry Kennelly

No you're the first one and so basically Atlas remains a funded development project in the company with a target for a product in 2010 and as we're closer to it, we'll talk more about it.

Unidentified Analyst

Okay. And then just you've mentioned about the blade that you're working on for HP and did you say end of 2009?

Jerry Kennelly

End of 2009, that's correct. But we're closing on right now with the separate boxes. The blade is the foam factor, it's not the driving issue in the development but it will be a nice to a have blade that people really want to buy it as it really works well.

Unidentified Analyst

So that's part of that ProCurve ONE initiative of that HP?

Jerry Kennelly

That's correct.

Unidentified Analyst

Okay. All right thank you very much.

Jerry Kennelly

You bet.

Renee Lyall

Thank you again for joining us today. Our next quarterly conference call to discuss our second quarter fiscal year 2009 results will be on Thursday, July 23, 2009. If you have any questions please contact Riverbed Investor Relations.

Jerry Kennelly

Thanks everyone.

Operator

And this does conclude today's conference call. You may now disconnect.

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Source: Riverbed Technology Q1 2009 Earnings Call Transcript

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