Riverbed Technology, Inc. Q2 2009 Earnings Call Transcript

Riverbed Technology, Inc. (RVBD)

Q2 2009 Earnings Call

July 23, 2009 5:30 pm ET

Executives

Renee Lyall - Director of IR

Randy Gottfried - CFO

Jerry Kennelly - Chairman and CEO

Eric Wolford - SVP Marketing and Business Development

Analysts

Jason Ader - William Blair

Troy Jenson - Piper Jaffray

Ryan Hutchinson - Lazard Capital Markets

Ken Muth - Robert Baird

Alex Kurtz - Merriman, Curhan, Ford

Rohit Chopra - Wedbush Morgan

Mark Sue - RBC Capital Markets

Erik Suppiger - Signal Hill

Tal Liani - Bank of America-Merrill Lynch

Shubho Ghosh - Thomas Weisel

Bill Choi - Jefferies

Sanjiv Wadhwani - Stifel Nicolaus

Jonathan Ruykhaver - ThinkEquity

Jess Lubert - Brean Murray

Presentation

Operator

Good afternoon. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Riverbed second quarter 2009 earnings 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. Ms. Lyall, you may begin your conference.

Renee Lyall

Good afternoon and thank you for joining us on today's conference call to discuss Riverbed's second quarter fiscal year 2009 results. I'm 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 VP of Marketing and Business Development.

Before we begin, let me cover some administrative items. A press release detailing our second quarter financial results was distributed today at 1:15 pm Pacific Time via Business Wire. The press release is also available on our website at riverbed.com. This conference call is being webcast live via the interest at riverbed. com/investors and will be archived on our website for the next 12 months.

The information that presents discuss today will include forward-looking statements including without limitation statements about Riverbed's financial results, business, financial outlook, sails pipeline and customer cost savings. 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 on our Form 10-Q for the fiscal quart ended March 31, 2009.

These forward-looking statements reflect believes, estimates and predictions as of the date of this call. Riverbed disclaims any obligations to update any forward-looking statements. Unless otherwise stated, financial information that we review on today's conference call is presented on a non-GAAP basis. These non-GAAP results exclude certain items to provide what Riverbed beliefs 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 revenue. Non-GAAP net income also excludes income, stock-the impact of stock-based payroll expenses, amortization of acquired tangible assets, acquisition-related expenses and related income tax effect. Non-GAAP financial measures should not be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results.

And I'm going to repeat that because I red it wrong. 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 a 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 Q2, 2009 press release which has been furnished to the SEC on Form 8-K today.

We will also refer to certain non-GAAP financial measures on today's call that were not reconciled to comparable GAAP measures in today's press release. We have posted a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measure 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 non-GAAP guidance that we will discus to comparable guidance, because we cannot readily estimate the impact of our future stock price on our future stock-based compensation expenses.

Any future product, feature or related specification that maybe referenced in today's call or for informational purposes only and are not commitments to deliver any technology ore enhancement. Riverbed reserves the right to modify or cancel future product plans at any time.

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

Jerry Kennelly

Thank you, Renee. Welcome everyone and thank you for joining us this afternoon. The past 18 to 24 months have been challenging for companies across all geographies and industry verticals. Throughout this time, Riverbed has posted solid results underscoring the value proposition of our products and technology.

While our achievement of double-digit revenue growth puts us in the top tier of tech companies reporting this quarter. I nonetheless knowledge that expectations have grown beyond this. but the effects of a worldwide recession contribute to less predictable and choppy IT spending. We believe our second quarter results understate the strength of our business and potential.

Looking at our pipeline, we feel better entering the second half of 2009 then we did the first half. Second quarter revenue grew 12% over the prior year to $92 million, and this was Riverbed's 14th consecutive quarter of year-over-year top-line expansion.

Our operating profit increased 11% over the prior year and net income increased 4%. Our balance sheet reflects a very healthy $269 million in cash and Marketable securities with distribution continues to expand and we now count more than 1,000 value-added resellers systems integrators and service providers as channel sales partners.

We continue to show traction with our systems integrators service provider partners and approximately a third of our bookings were through this channel including some of the largest transactions during the second quarter.

Our extended product offerings including Cascade, the Riverbed services platform and Steelhead mobile are proving to be very strong competitive differentiators. In making their purchase decision, customers like that Riverbed can offer the most comprehensive and unified WAN optimization solution from laptop to data center. They like the integrated offering of WAN optimization with the added visibility, analytics and reporting capabilities provided by Cascade.

During the second quarter, we began to experience the benefits of both cross and joint-selling for our Mazu acquisition with several up sells of the Cascade product into Riverbed's install base. The pipeline for Cascade products is growing and we are optimistic about the second half of the year.

Customer reception for the Riverbed services platform has been very positive since we launched the enhanced version in November 2008. The tax rate doubled over the first quarter and our largest Q2 deal included RSP.

We were adding two security offerings to the RSP platform; one from Check Point and one from Websense bringing the total number of qualified solutions to nine. On Monday, we will launch Steelhead Mobile Controller-Virtual Edition, or SMCVE, that will also run on RSP.

By running Steelhead mobile within the services platform businesses can obtain the same benefits of mobile without purchasing additional hardware. This expands the market opportunity for Steelhead mobile by introducing a lower entry price for smaller customers who may not need so many licenses or for larger customers who want to try mobile on a more limited scale.

I will provide an update on the progress we made in our relationships with some of our largest technology and channel partners. As we look forward these partnerships are an important piece of our strategy to expand distribution, market and brand awareness.

In May, Riverbed and Microsoft announced they were working together to enable branch cash functionality and Steelhead appliances as part of the release of Windows Server 2008 R2. This functionality will be supported by the Riverbed services platform. This announcement builds upon and strengthen the new ties with Microsoft as a member of their program for protocol licensing and as an OEM partner.

We continue to gain traction in the business continuity disaster recovery segment of the storage market, commonly referred to as BC/DR. In the first quarter, we announced E-lab qualification with EMC's SRDF/A. products for disaster recovery.

During the second quarter, we achieved successful qualification with Hitachi True Copy and Hitachi Universal Replicator business continuity software. This is an additional to our existing qualification to optimize replication between the Hitachi high-performance announced platform.

We've also added a major reseller for our data center Steelhead appliances designed specifically for BC/DR and we will make a formal announcement within the next few months. Riverbed's core value proposition resonates strongly in the BC/DR market, where massive amounts of data are copied from data center to data center over the Wide Area Network.

In many instances not only do our products accelerate replication, but they also help customers avoid down with upgrades. We are pursuing qualifications with other storage vendors as we seek to expand our footprint in this growing segment of the WAN optimization and storage market.

The WAN optimization market remains a very large and under-penetrated opportunity. Critical business initiatives depend on it including data center consolidation, Server Virtualization, Disaster Recovery, Virtual Desktop Infrastructure and other projects.

While not recession proof, spending on WAN optimization has proven more resilient than overall IT spending. Riverbed is the recognized leader in this space, once again positioned in the leader's quadrant of the magic quadrant.

Riverbed continues to be the market share leader having gained revenue share in both the WAN optimization controller and Advanced Platform markets as measured by Gartner in their recent report.

In the Advanced Platform category, Riverbed holds 31.4% share, our highest market share since the analyst firm began tracking the space. Our closest competitor lags behind at 23% of share. Some of what I discussed about an overall market and competitive position continues to strengthen. Our areas of strategic focus, product development, enhanced technology partnerships, increased distribution and brand awareness are yielding encouraging results.

With that, I'll turn the call over to Randy.

Randy Gottfried

Thanks, Jerry. As a reminder unless stated otherwise, the numbers I'll discuss today are non-GAAP. For your reference, in addition to the reconciliation included in the press release, we posted a supplemental reconciliation of non-GAAP financial measures to the directly comparable GAAP measures on the Investor Relations portion of our website.

Total revenue increased 4% sequentially and 12% year-over-year to $91.6 million. Product revenue was about flat compared with Q1 and declined 4% year-over-year to $60.3 million. Second quarter service revenue increased 65% compared to the year ago period and 12% quarter-over-quarter to $31.3 million.

The majority of our service revenue comes from our support contracts. Services revenue in the second quarter benefited from our continued focus on improving our support renewal process. Looking forward, we expect service revenue growth to moderate. As expected, Cascade contributed about $3 million to total revenue in the second quarter, almost even split between products and services.

Turning to distribution, 91% of our revenue came from indirect channels with remaining 9% coming from direct sales. As Jerry said earlier, the systems integrator service provider channels contributed just over 30% to bookings and value-added resellers were about 60%. Geographically, the U.S. represented 55% of total revenue, EMEA contributed 27%, and rest of world was 18%.

Our revenue stream continued to be diversified with no customers or channel partners representing 10% or more of revenue. Looking at revenue by vertical, we had five to six verticals contribute 10% plus or minus to product revenues, six to seven contribute about 5%. Government, manufacturing, finance and technology were the largest verticals each contributing more than 10% to product revenue with government in the mid-teens. As a reminder, the government vertical is comprised of U.S. Federal, local, state and international.

Let me shift to cost and expenses. Product gross margin was 77.6% in Q2, up from the first quarter. Service gross margin came in at 73.4%, about flat compared to Q1. Our service margin benefited again this quarter from strong renewals. As we've said before, we expect our longer term service gross margins to be closer to 70%, combined our gross margin was 76.1% compared to 75.7% in Q1.

We exited the June quarter with 963 employees, up from 939 at March 31. Sales and marketing and R&D expenses increased sequentially in absolute dollars, primarily due to the full quarter with the Mazu employees. G&A expenses decreased quarter-over-quarter in absolute dollars. Excluding Mazu, total operating expenses declined modestly Q1 to Q2, as we continue to closely manage expenses.

Our operating margin was 16.7% this quarter, up 150 basis points sequentially and about flat with the year ago period. Other income fell to $45,000 as maturity items in our cash book portfolio have been reinvested at much lower interest rates and we experienced non-operating foreign exchange losses.

The tax rate for the second quarter was 33%. Net income was $10.3 million or $0.14 per share. Net income increased 12% sequentially and 4% year-over-year. We reported a GAAP loss of $290,000 essentially breakeven per share. GAAP results include a number of entries related to our acquisition of Mazu.

As I said before, under new acquisition accounting rules, there maybe meaningful expense fluctuations up or down in our GAAP results over next nine months driven primarily by the earnout component of Mazu acquisition. We expect our GAAP tax rate to be higher than 100 percent for the remainder of 2009 largely driven by the tax accounting treatment of the acquisition-related items. We'll provide additional disclosure in our 10-Q filing for the June quarter

Moving on to the balance sheet, Riverbed ended the June quarter with cash, cash equivalents and marketable securities of $269.2 million and we continue to have no debt. During the second quarter, we purchased almost 381,000 shares or $6.8 million of Riverbed stock under our buyback program at an average price of $17.81 per share. We have approximately $33 million remaining under the program.

Cash flow from operations was $8.2 million compared to $27 million in the first quarter. The decrease in operating cash flow was largely driven by an increase in accounts receivable, day sales outstanding to 49 days versus 44 days in Q1. Our targeted range for DSO remains between 50 and 60 days.

Inventory totaled $9.2 million at June 30, compared to $8.7 million at March 31. Total deferred revenue was $69.9 million, an increase of 8% over March 31. The majority of our deferred revenue is derived from maintenance and support contracts.

Turning to our third quarter outlook, while we're aware that the sales environment continues to be challenging, our pipeline is at the highest level we've experienced. We feel optimistic about the enterprise sector as we experience an uptick in non-government sales in the U.S. in the second quarter and we expect to benefit from the federal purchase cycle typically characterized by stronger buying activity in the September quarter.

Our third quarter guidance is non-GAAP. We expect to deliver sequential and year-over-year revenue growth with revenue in the range of $95 million to $99 million, largely driven by product revenue growth. We expect our gross margin to be about flat with the second quarter. We are planning for operating expenses between $56 million and $58 million, up somewhat sequentially. We expect the tax rate of 35%. We are forecasting EPS of between 14 and 16 cents based on about 73 million diluted shares outstanding.

I will now turn the call back over to Jerry.

Jerry Kennelly

Thank you, Randy. Before we take your questions, I want to talk a little bit more about our guidance and while we feel good, not only about the third quarter but about our future. Our pipeline is the highest level it has been in our history. Our competitive position is stronger than ever and we are taking market share.

After six years of peer's competition, Riverbed is still the acknowledged leader in the WAN optimization market. We enter the third quarter feeling confidence about our ability to capture the opportunity of this market. We continue to target revenue growth to outpace spending and we see positive signs as we look forward.

As Randy said, we are beginning to see more activity within the U.S. enterprise and the third quarter is typically characterized by strength in the government's protocol. We believe we will continue to gain traction with larger channel partners and enterprise customers. We feel very good about the reception we are seeing with customers and potential technology partners as we expanded the Riverbed's services platform.

In our advanced development projects, we are receiving positive feedback from customers. The highest praises you can receive from a customer is a recommendation to another customer that reads, quote, "After 20 years in IT, my experience is that most products don't live up to their hype." Riverbed is the exception. It does what they say it will do. This statement reflects by customers choose Riverbed time and time again.

While many technology companies have been reporting year-over-year double-digit declines, Riverbed continues to show growth. As I said, we believe our second quarter results understate our potential. Riverbed enters the third quarter with positive momentum and we feel better entering the second half of 2009 than we did the first half. Should the economy improve, we are well-positioned to take advantage of an upturn in IT spending.

With that said, Randy, Eric and I would now been happy to answer any questions you may have. Ashley, you can now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Jason Ader with William Blair.

Jason Ader - William Blair

So the question on everyone's mind is I think what happened. I mean, you guys have been bidding numbers pretty solidly for [four straight] quarters through one of the worst economic environments we've ever scene. Now as things start to improve at least modestly in terms of the macro, you guys miss the consensus. So it's just kind of a little bizarre. So could you help us understand what happened specifically in the quarter? Were there a few large deals that didn't close that you expect to close? Any color I guess on what exactly happened that is below -- that was meaningfully below your expectations?

Jerry Kennelly

Yeah, Jason. We had, sort of, I call a normal linearity quarter in terms of our overall history, but in fact within that we were at the sort of bottom end of our linearity and we had a late breaking quarter. We had a huge rush of momentum at the very end of June and I think that momentum communicated itself to many analysts through the resellers who just saw a lot of Riverbed activity and a lot of people choosing Riverbed, and that was true.

There was just enough kind of choppiness in their selection, lateness in the quarter and selection by big customers through the bigger SIs and SPs, but it just takes time to turn the orders around that it caused us to come in at the low end of our guidance and not make the higher expectation that people had.

So, again, the few companies that have positive real growth and I sort of feel horrible to have to, say, we missed expectations when we are at the top of what people are doing in the market right now, but with did miss some we think it's a Q2 phenomena and we feel good about going forward.

Jason Ader - William Blair

Then you talked about the sequential growth, Randy, being driven by product revenue mainly. Are we to assume that you expect a pretty significant our in the Cascade product just driven by the pipeline that you talked about?

Jerry Kennelly

We are assuming some uptick. Our overall assumption is $3 to $4 million is for Cascade in the third quarter. We think about the overall growth baked into our guidance into Q3, that comes a little bit from Cascade, but mostly from just basic growth in the business. Some, which from Federal some from commercial enterprise spending, which we felt reasonably good coming out of the second quarter.

Jason Ader - William Blair

One last thing. Just to reconcile something you said, Jerry, you talked about an uptick in the non-government U.S. enterprise activity and yet it sound like you had overall a tough quarter, I guess at least relative to your expectations. Which was it, something outside the U.S. where you, I guess which geographies were the toughest?

Jerry Kennelly

Well, we saw in the comment I believe I mentioned was non-federal U.S. business was up in the quarter. If you look, if you compare the regional stats, Asia was down somewhat, but we expected that a little bit in that Asia was especially strong in the first quarter and we didn't expect that to continue.

Jason Ader - William Blair

Europe was as you expected?

Jerry Kennelly

I'd say in general we absolutely as aspired to do more revenue. We, clearly, expected to do more. I wouldn't narrow it down to specific geography on where we came in a little bit lighter.

Operator

Our next question comes from Troy Jenson with Piper Jaffray.

Troy Jenson - Piper Jaffray

Just a follow-up on a, Jason's question there, on the fed vertical, Randy, can you give any color, what percent of revenues it was in Q2 or maybe what it was last Q3?

Randy Gottfried

Well, again, the government vertical is all government. Within that federal, it does vary and it does bounce around even within the year. Clearly in the third quarter, you get a lot of the growth driven by U.S. Fed.

Jerry Kennelly

But government in Q2 was in mid-teens for us and we'd expect it up a bit from that in Q3.

Troy Jenson - Piper Jaffray

Then I know you said a 30 percent of revenues came through service provider customers. Can you just tell us what it was last quarter? First, just want to get a confirmation that that vertical is growing for you, for that channel as you say.

Randy Gottfried

I think we said last quarter was about a third.

Troy Jenson - Piper Jaffray

About a third, so it actually, did it decline on a sequential basis or...

Randy Gottfried

No, it's flattish.

Troy Jenson - Piper Jaffray

Flattish, okay, I got you. And then just...

Randy Gottfried

Again, just to be clear on to semantics, we talk about systems integrator service providers combined sort of the big partner category for us.

Jerry Kennelly

It's indistinguishable from each other. They mimic each other these days.

Troy Jenson - Piper Jaffray

One more follow-up by Jason here. This is the first quarter that you guy's year-over-year product is actually down. Is this, I mean do you sense the market slowed here or is it competition has picked up? Is any change in your run rates? Just a little more color on why the deceleration.

Jerry Kennelly

The market is slower. It's down slightly. Basically, it's flat, so I think it is down slightly, but, yeah, it's definitely the economy and we expect that to improve going forward.

Troy Jenson - Piper Jaffray

Win rates still a 90% of the time.

Eric Wolford

Yeah, Troy, this is Eric. Yeah, our competitive position, we actually feel like this past quarter strengthened if you look at the market share report that Gartner picked up, the Magic Quadrant plus internal win rate it all looked very strong.

Operator

Our next question comes from Ryan Hutchinson with Lazard Capital Markets.

Ryan Hutchinson - Lazard Capital Markets

Yes. A couple questions sort of follow-ups as well. When I look at this, it looks like the core Riverbed product revenue when you exclude Mazu was down about 2% quarter-over-quarter. I think Randy, you expected expectations were 4 million if I have that correct.

Just was wondering what the split between the products and services is for next quarter and then the expectations for the core product revenue growth in the September quarter.

Randy Gottfried

We haven't given a would lot of detail. I'd say, in general, most of the growth in Cascade quarter-on-quarter is coming from product increases.

Jerry Kennelly

But in the second quarter, we said that the Cascade revenue of about 3 million was roughly 50/50 products and services in that. In Q3, it would be between 3 and 4 million. So it would be in the third quarter, the Cascade portion would be more like 60-40 products and services. Something roughly like that.

Ryan Hutchinson - Lazard Capital Markets

Right. Services are going to grow and the rest of that is core product revenue. So would you expect the core product revenue to grow then?

Jerry Kennelly

Exactly.

Randy Gottfried

Yes.

Ryan Hutchinson - Lazard Capital Markets

On the operating expenses on an adjusted basis we're only up about 2%, but you managed to meet the EPS guidance despite the revenue shortfall, but yet lower other income and higher share counts. So I guess the question is when did you guys begin to pull back on the spend in the quarter in anticipation that you're going to come in towards the low ends of guidance?

Randy Gottfried

Well, actually, if you look at the guidance we gave for operating expenses in Q for the second quarter, we came in pretty close to the guidance that we gave. So there wasn't a big difference.

Jerry Kennelly

We had our path to our full revenue guidance all the way to the very end of the quarter, Ryan, and -- we had another day or two there.

Ryan Hutchinson - Lazard Capital Markets

I will jump back in the queue, but I just want to get some color. It sounds like there were some deals late in the quarter that perhaps slipped and has since closed and that's why you guys feel comfortable giving the guidance you've given.

Randy Gottfried

We baked in all the experience that we have for. There is always some push, so we want to be careful how we phrase it, but, yeah, we baked in everything that we know about last quarters achievement and this quarter is about all I know, overalls sales cycle that we're seeing right now.

Ryan Hutchinson - Lazard Capital Markets

Any change to the methodology in terms of closure rates in the guidance.

Randy Gottfried

Well, we always try to do better and certainly, we take all of our learnings from each quarter and try to recalibrate as best we can and incorporate that into our guidance setting for the following quarter. We've done that for Q3.

Operator

Our next question comes from Ken Muth with Robert Baird.

Ken Muth - Robert Baird

First part as if I missed it. What was the percent of revenue from new customers versus existing?

Randy Gottfried

Contribution from new customers was a third. Which is up slightly from Q1.

Ken Muth - Robert Baird

Okay. Again it looks like you're customer editions are still progressing at pretty much the usual rate but the product revenues are not at the levels it was. So is it fair to say the initial deal sizes are a lot smaller than historically?

Randy Gottfried

I guess you could do that math. We never have gotten worked up about the volume of revenue generated from new customers. The key thing for us is to get a lot of new customers and particularly the biggest new customers. The life to date potential is most exciting for us how much they by that initial purchases is less interesting and less important frankly.

Jerry Kennelly

It's a tricky statistic. Our largest sale is a seven digit sale. That customer bought a couple of boxes last quarter as a paid trial. Their purchase this quarter was really their first purchase as a new customer but in our statistic a because they bought a couple of boxes last quarter in a paid trial, they go in the existing customer bucket instead of the new customer bucket. So it gets tricky.

Ken Muth - Robert Baird

Just to your previous comment, I just want to be clear on the choppiness and in kind of rush of activity at the end of the quarter. Does that suggest that had you a strong start to Q3 here with those deals closing, that's kind of a source your optimism?

Randy Gottfried

No, we factored everything into our guidance. We have not called out anything specifically about any more into our guidance.

Renee Lyall

Everyone, we have a lot of people in the queue, so if you can try to limit to two questions and then go back in line so we can try to get to everybody's questions.

Operator

Our next question comes from Alex Kurtz with Merriman, Curhan, Ford.

Alex Kurtz - Merriman, Curhan, Ford

Just a follow-up question on just sort of the average deal size. I know it sounds like had you several large deals in the quarter, but if you really looked at your core transactions, new and existing customers, are you seeing any noticeable trends quarter-over-quarter in the size of the deals? Thank.

Randy Gottfried

Deal sizes really haven't changed a lot. The vast majority of our transactions are still under $100,000 with no great change in those stats.

Operator

Our next question comes from Rohit Chopra from Wedbush Morgan.

Rohit Chopra - Wedbush Morgan

A couple questions here. Just want to do get an update on mobile, if you can tells where that came in, in the quarter.

Randy Gottfried

That came in about, by itself about 3% of revenue which you look at our 16 miles that makes it the seventh or eighth largest selling model in the line. Beyond the direct revenue attributed to that SKU, it's very important in pulling in overall Steelhead revenue and being a competitive differentiator. So we continue to improve the product and people like it and we are happy with it.

Rohit Chopra - Wedbush Morgan

Then the other question is, is there anything different when you are getting into, I guess, the red zone when you are competing with somebody else? Is there anything different than their customers are asking for that you may not be able to provide and that maybe caused some change in the revenue expectations?

Eric Wolford

Sure, yeah, we are constantly trying to take that feedback from the marketplace and make changes. So one of the once that we made most recently was the introduction of Steelhead Mobile Controller-Virtual Edition, SMCVE, which were we were noticing some hesitancy to get started and that we could get people started sooner, if we could eliminated a box.

So we eliminated the need to get started buying a Steelhead Mobile Controller box and now we take advantage of our Riverbed services platform and allow people to put a virtual Steelhead mobile controller on to an existing Steelhead. The entry price point is lower. Cost per user is still strong, but they don't have to buy 30, they can by 10 concurrent connections all at once. We think that's going to help get people using it sooner and address a different market.

Jerry Kennelly

Plus you can expect us to be punching much harder in the business continuity disaster recovery segment of the market. That looks good for the second half of the year.

Rohit Chopra - Wedbush Morgan

That wasn't the cause of any of the weakness or anything like that that we saw. I don't want to say weakness, but I mean...

Jerry Kennelly

No. We don't attribute that to product issues...

Eric Wolford

New.

Jerry Kennelly

…or product features.

Operator

Our next question comes from Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets

Jerry, it's still puzzling since most people think the economy is better now when you miss versus before when you beat, so is there a delay factor that's kicking in? And if so, who is creating the delay? Is there a saturation at large customers or taking some digestion, or maybe was the March quarter artificially higher so the comps look a little off?

Jerry Kennelly

So it's a complicated question. The economy looks better now July which is Q3. For most of Q2, I don't think the whole world was saying the economy looked better through the second half and now we are in the second half. People who have done better than their expectations will guide, you have a lot of people who guided down 10% or 15% year-over-year or flat year-over-year who managed to come in only down 8% year-over-year or maybe eke out a 2% or 3% gain year-over-year versus their guidance.

And so, we delivered a 12% year-over-year gain, but worse than our expectations I guess, we suffer from that, but we actually had one of the strongest performances in the whole technology sector. So all that being said, the second half is what looks stronger, not the first half, not the second quarter and we're prepared to do well in it.

Mark Sue - RBC Capital Markets

Separately, was there a buyback during the quarter?

Randy Gottfried

Yes. We repurchased just under $7 million worth of stock.

Operator

Our next question comes from Erik Suppiger with Signal Hill.

Erik Suppiger - Signal Hill

Just coming back to the deals, can you give us any sense for how many deals did not close at the end of the quarter and maybe what kind of increase in backlog you have this quarter over last quarter?

Randy Gottfried

I don't think we call out sort of specific transactions. The key message for us is we did see some choppiness in the cycle. Again, it was relatively solid quarter in many respects, though clearly we aspired to do a better job. As far as, again, if we closed it, we closed it. The comments we made in our guidance for Q3 are based on what we see in the funnel lead-out activity, the product and partner flow and so on.

Erik Suppiger - Signal Hill

Do you expect your DSO to come down in the September quarter?

Randy Gottfried

I won't say our long-term target has always been 50 to 60 days. It was especially good in Q1 and it did edge up Q1 to Q2, but even at the Q2 levels was slightly under our long-term target.

Erik Suppiger - Signal Hill

Do you expect your linearity in Q3 to be better than usual, though, in light of some of the deals that slipped?

Randy Gottfried

We typically not commented or given guidance on our linearity. I mean as a general rule, we target about 50% in the first two months of the quarter and about 50% in the last month of the quarter.

Erik Suppiger - Signal Hill

Can you provide any level of color about what kind of deals it were, were they typically any particular vertical that came in late or any size customer that slipped?

Jerry Kennelly

I guess the way I characterizes that there's a lot of places where we are selected and people are figuring out how to get the [PO] out to us and that's particularly true where you use the larger partners and I can't really go on much beyond that.

Erik Suppiger - Signal Hill

It was just getting sign off from some of those customers?

Jerry Kennelly

It's a world where you can negotiate, you can be selected, you can have the deal negotiated and then you still have to get through the Director of Purchasing, the CFO and this economy sometimes, they react right away and sometimes they sit and stew for awhile. So at our scale of a quarter, we are talking about a couple million dollars, we are not talking about tens of millions of dollars here versus what people would have seen as a big harra.

Operator

Our next question comes from Tal Liani with Bank of America-Merrill Lynch.

Tal Liani - Bank of America-Merrill Lynch

I have two questions. Both of them are kind of big picture questions. The product revenues are down year-over-year for the first time. It looks like it's going to be down again the following quarter and perhaps even the following quarter. The question I have is on the industry itself.

When we see acceleration, your industry seems to not having an acceleration as much we want to see and the question is what's different here versus [layer 47] or switching or routing. We just had other networking companies that gave us the opposite picture. So that's kind of a high level question that I want to do discuss.

And the second one, every company we speak with is saying that they are the leaders in WAN optimization. Again, you've quoted numbers. Everyone is quoting different numbers. The question I have is whether you can tell me maybe there are different angles that you address versus Blue Coat are more interested. Cisco I know their angle are more interested in the smaller companies when it comes to company size, smaller companies. What are your angles versus their angles and how do you share the market? Thank you.

Jerry Kennelly

So I think, well (inaudible) here, so first of all, we are saying we will have positive revenue growth for the rest of the year, not a year-over-year decline. [Hard] store numbers and we can help you with that it turns into positive product revenue growth both in Q3. We haven't given Q4 guidance, but we believe in Q4, at this time, that it will be positive revenue growth. In terms of the competitive market share I will let Eric describe that.

Eric Wolford

Sure.

Tal Liani - Bank of America-Merrill Lynch

One clarification. On the product, we have not given any specific category of revenue guidance for Q3, so.

Eric Wolford

Tal, this is Eric. On the competitive front our competition is as you mentioned, Cisco is the main competitor four to one versus anyone else. The next two that we see are Juniper and Bluecoat and we see them about the same amount. Then there is a big jump off into the other players which include Citrix and Expand and F5 has a product and Silver Peak has a product. So that is sort of the make up where we have these three layers, Cisco, then Juniper, Bluecoat, then a group of other folks that we just don't see that frequently.

The once we spend the most amount of time competing with are the first three and primarily Cisco. So the way we end up winning most of the time is because our product is faster and easier than the alternatives at the scale the customer wants to deploy. So that's usually the scorecard the customer is usual. Who is faster for the applications I care about and who is easier to deploy and manage at the scale I want to deploy and manage. Regardless...

Tal Liani - Bank of America-Merrill Lynch

With the security angle of Bluecoat, does it add any dimension you don't have?

Eric Wolford

So, I mean, there is sort of tied with where is Internet access going to go. So Internet access in many customer environments is done at the data center and some customer environments I think that we've seen it is 10, 20% is done at the edge. It's where Internet access at the edge is where there's a potential for there to be a fusing of those two products.

We've announced relationship with Check Point and with Websense to provide that type of a combined solution, because customers who have Internet access at the edge also want VPN kind of services and solutions, which Bluecoat doesn't offer.

So, there is a segment of the market where that makes sense, but I would say the majority of the market does most of that Internet gateway security at the core.

Operator

Our next question comes from Shubho Ghosh with Thomas Weisel.

Shubho Ghosh - Thomas Weisel

My question has been answered. Thank you.

Operator

Our next question comes from Samuel Wilson with JMP Securities.

Unidentified Analyst

Hi, this is [Doug] for Sam Wilson. I wanted to ask about the Mazu earnouts. Is there any way for us to think about how those are going to impact your results going forward? You said something about them being unpredictable and lumpy, and I just wanted to know if I need to think about them when I am looking forward?

Randy Gottfried

Again, we pro forma those out in our non-GAAP numbers. Our 10-Q, both from last quarter and then our upcoming 10-Q will have a lot more detail. There is a formulaic range that translates into how much we'll pay out. That's based on the period through our Q1 of 2010. I think it's probably more complicated than I can go through on the call. I'd urge you to take a look at last 10-Q and upcoming 10 Q as well.

Unidentified Analyst

Then I was wondering about the linearity and visibility going forward. I know it's been talked about a few times. Just I'm concerned, because DSOs were up and your revenue was below guidance, and I was just wondering how that's going to be taken into account going forward.

Randy Gottfried

Well, again, we base our visibility on a number of things. So we base it on funnel activity and evaluation activity with the support revenue stream, which is basically an amortized revenue stream and we try to incorporate all the information we know about specifically what's going on opportunity-by-opportunity in our guidance.

So we think, overall, we've got decent visibility and we think we have incorporated what we've learned in the second quarter into our third quarter guidance.

Unidentified Analyst

Then the last thing I want to ask was just on the Riverbed Services Platform. Can you give any color as to how that's, how that's playing out? Do you see that as a differentiator that's helping you grow? Is it a big revenue opportunity going forward?

Eric Wolford

Yeah. This is Eric. Yeah, in the past, in Q2, Riverbed services platform was a real bright spot for us. It's the attach rate, the number of boxes that we ship, the proportion of those that were ordered with purchasing Riverbed service platform doubled Q2 over Q1. So we were incredibly pleased with that.

We talk to our sales force and they tell us regularly at their territory reviews that it's a key source of uniqueness and differentiation and something that is, as Jerry mentioned, was included in the largest sale that we did this quarter. So, the Riverbed services platform is a big contribution.

Now I need to point out one thing, which is that it was never designed as a standalone product. It is an additional product and add-on product that helps us sell Steelhead. So the real wind in the sale long-term is helped in making us sell more Steelhead units.

There will be incremental unit from RSP, customers do pay more for it. The list price is around $1,800 per unit. So there is incremental revenue, but the biggest list that we are looking for is in helping us sell more Steelhead.

Operator

Our next question comes from Bill Choi with Jefferies.

Bill Choi - Jefferies

Question has been answered. Thanks.

Operator

Our next question comes from Sanjiv Wadhwani with Stifel Nicolaus.

Sanjiv Wadhwani - Stifel Nicolaus

Randy, if you exclude Mazu from your seconds half or September quarter guidance, I mean are you still expecting organic Riverbed to have positive momentum in the second half? Just curious as to what your thoughts are over there.

Randy Gottfried

Yeah, we are assuming growth outside of just the addition of Mazu.

Sanjiv Wadhwani - Stifel Nicolaus

So basically just organic Riverbed should have a good second half, solid second half as you're suggesting overall for the company even if you exclude Mazu basically?

Randy Gottfried

Yeah. That's part of our guidance in Q3, yes.

Operator

Our next question comes from Jonathan Ruykhaver with ThinkEquity.

Jonathan Ruykhaver - ThinkEquity

Yeah. Hi, just wonder if you can quantify the dollar amount of OpEx spending that's related to Atlas at this point?

Randy Gottfried

We've never called out a specific dollar on any of our development projects, so I'm afraid we are not able to start here.

Jonathan Ruykhaver - ThinkEquity

Can you at least give some color? Would you characterize it as material?

Eric Wolford

What we said was that the ongoing project wasn't going to, I remember one of these questions was, was it going to cause us to have to increase our R&D spend, and R&D spend has stayed pretty consistent quarter-to-quarter and we don't anticipate investments in Atlas causing to us change that.

Jonathan Ruykhaver - ThinkEquity

Just one final quick question related to the Riverbed services platform. What are the applications that you see getting the most traction today?

Eric Wolford

Yeah, sure. This is Eric, again. Without a doubt, the application that has most interest is one I think everyone expected, which was Microsoft-related products windows and various product related come from Microsoft, that's why we have such a strong partnership with Microsoft, because it's very much in demand.

Streaming media is starting to have an uptick. Applications sensors and to some extent, we are just launching now with Check Point and with Websense, so we'll see what happens there.

Jonathan Ruykhaver - ThinkEquity

What have you seen in terms of activity to date with the security applications that supports?

Eric Wolford

As the press releases are just hot off the press this quarter and they are just becoming generally available right now, so a little too early to tell.

Jonathan Ruykhaver - ThinkEquity

I think it was 12 months ago, didn't you announce partnership with, I think, it might have been Forge and Secure Computing?

Eric Wolford

Secure Computing had announced an intent to develop a module for RSP, but then they were acquired so they kind of lost track of that and it's being spun up again. So, that one was sort of delayed due to that acquisition.

Operator

We are now taking our last question from Jess Lubert with Brean Murray.

Jess Lubert - Brean Murray

A couple quick questions. In regards to some of your partnerships, can you give us an update on the EMC channel? In the last couple of calls, you mentioned a significant number of leads in the pipeline. Have you begun to see any of those convert into revenue?

Eric Wolford

Since we have announced our qualification, which is what we announced in January, we do have several handfuls of customers and some strong case studies and testimonials that we are using. We continue to invest in business continuity, disaster recovery. We do see it as an attractive segment and you see we have announced other partnerships with other providers, storage providers targeting that same application. We will continue to invest in product improvements in that area.

Jess Lubert - Brean Murray

So, was there deal revenue contribution this quarter from that channel? And then I guess just on HP, has that begun to contribute yet?

Eric Wolford

Yeah, so just one clarification. HP, the ProCurve relationship and EMC, those are both kind of marketing relationships or go-to-market relationships. So there isn't resell per se through those two. At the same time, we did definitely sell products for business continuity, disaster recovery, we do every quarter.

Randy Gottfried

Just to clarify on HP. HP in other parts of their business has been a partner with us for some time.

Eric Wolford

That's correct.

Jess Lubert - Brean Murray

Okay. And then our checks have suggested that Bluecoat is attempting to get legacy Packeteer customer to upgrade to SG appliance. Have you these initiatives open up any competitive opportunities for you. Specifically in regards to Cisco, are you seeing the more or less or the same as in last periods?

Eric Wolford

Question one, yes. The there is a discontinuity in people reevaluate when they go from one product to another, so the Packeteer thing has opened up opportunities for us that have increased our funnel without a doubt. Then secondly, Cisco is the dominant competitor four to one over anyone else, and we see them hundreds of times every quarter.

Jess Lubert - Brean Murray

But no change in their behavior versus prior quarters?

Eric Wolford

No, no change. It's aggressive. It's very competitive, but no change.

Renee Lyall

Thank you, everybody for joining us today. Our next quarterly conference call to discuss our third quarter fiscal year 2009 results is currently scheduled for Thursday, October 22nd. During the third quarter Riverbed plans to participate in the Canaccord Adams and Oppenheimer investor conferences in August. All presentation will be available via audio webcast at Riverbed.com. If you have any questions, please contact Investor Relations.

Operator

This concludes today's Riverbed second quarter 2009 earnings conference call. You may now disconnect.

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