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Riverbed Technology Inc (NASDAQ:RVBD)

Riverbed Technology at Citi Global Technology Conference

September 03, 2013 9:45 a.m. ET

Executives

Ernie Maddock – EVP, CFO

Analysts

Kim Watkins – Citi

Kim Watkins – Citi

This is the session with Riverbed. To my left is – well, I will introduce myself first. My name is Kim Watkins. I am on the communication equipment and data networking team here at Citi. And to my left is Ernie Maddock, EVP, CFO, and Head of Worldwide Ops and IT, so plenty of things that we can ask Ernie about that he’s in charge of.

As many of you probably know, he joined Riverbed in late April after 16 and a half years at Lam. So I'm sure he is familiar to many of you. He had been CFO at Lam since 2008. He also held several other senior positions at Lam, including SVP of Global Operations and Vice President, Customer Support Business Group. So welcome, Ernie. Thanks for joining us.

Ernie Maddock

Good morning. Glad to be here.

Kim Watkins – Citi

So, I think the obvious question I'd like to ask, just to begin, is that what attracted you to Riverbed and convinced you to take the job? And what are some of the things that you have been pleasantly surprised about since joining? And where do you see the opportunities?

Ernie Maddock

Sure. So one of the things I think both Lam and Riverbed have in common is great relationships and reputations with their customers. And I was actually a customer of Riverbed long before I became aware of it as a potential employer, or frankly, as an investment. And it was that customer relationship that my CIO and I had both had with the Company that attracted me to the opportunity to begin with.

And then did a little research, and you find that highly innovative products. You find employees really loving the Company. We’re one of the most highly rated employers through Glassdoor. And then, you come in and you meet the people, and really that's about all it takes to convince you that there is great opportunity there.

Since I've been with the Company, I think, pleasantly surprised that a lot of the congeniality and cordiality that existed during the interview processes is actually an integral part of the culture of the Company. And so, it is a Company that has high levels of respect, high levels of achievement, high levels of collaboration and cooperation, and those are always a great place to start in terms of an environment in which to build and grow.

And I think the challenges probably aren't too secret. The Company has gone from a relatively focused, simple product line set to a highly complicated environment with now 4 products; a pretty significant acquisition that we're still in the process of digesting. And so, those all represent opportunities for us to get those things completed and resume what we feel is going to be an exciting growth trajectory in 2014.

Kim Watkins – Citi

Okay. So, we’ll definitely dig into that a little bit more later.

Ernie Maddock

Sure.

Kim Watkins – Citi

The second thing I wanted to ask you, though, was there have been quite a few senior management changes at Riverbed – I mean, yourself; and Eric Wolford recently announced his retirement. He’s a long-time employee, voice to the Street, and the President of the products. And then, there was also an appointment of a new CIO.

So, with all these changes, can you give us some perspective on the implications to Riverbed? And more specifically, who is taking over Wolford's responsibilities and how you expect that transition to play out?

Ernie Maddock

Sure. So, the best description that I've ever heard of is that Riverbed is on its second arc. So, the first arc brought it to where it is, a billion-dollar Company. The second arc, if you will, for simplicity's sake, is the journey from $1 billion to $2 billion, and that will take place with many things being the same and many things being different. And one of the things that is often different is the composition of the team.

So, people who were very instrumental in going from nothing to something quite substantial – no surprise, invested significant time, energy, sacrifice, personal efforts to get the Company where it is, and there has been a huge amount of longevity among the Riverbed senior management team.

So, until the end of 2012, I think that the tenure among the leadership team was – or the turnover was 0%. So, you have a lot of folks who got to a logical ending point, are looking around at what they personally want to achieve in the next phase of their careers, and they’re deciding that they either want to – in Eric's case and Randy's case, frankly, retire and spend a little bit more time pursuing personal efforts.

And it's no different than what brought me to Riverbed. I was ready to try something different for the next phase of my career. And our new CIO, who was a very senior IT executive at Cisco, same sort of saying, she was ready to step up into a top spot.

Relative to Eric's specific responsibilities, we're still in the process of working through that. As you know, Eric is not leaving until sometime in the fourth quarter, so it's not as if there is a huge amount of time pressure. So, we'll work through that. And as that becomes something we conclude on, we will talk a little bit more about that.

Kim Watkins – Citi

Okay. Then, let's just transition a little bit and talk about the demand environment.

Ernie Maddock

Sure.

Kim Watkins – Citi

Because Riverbed has seen some pretty interesting trends. US enterprise sales have been very strong for two quarters now. They were up 19% year over year in Q1; up 15% year over year in Q2. What's driving this growth, and how sustainable do you believe it is? And are there any verticals or products that stand out as stronger than others?

Ernie Maddock

Well, the year-over-year growth comparatives are across the breadth of the Company's product lines, actually. And so, you have some of the Steelhead product line, which as a product line has grown more slowly than the others.

But we do see that there is fairly strong spend among several of the key verticals that we would consider enterprise. So, in the manufacturing sector, professional services, financial institutions, we really have not seen something singular that has driven that. It is really strength across a breadth of those sectors, and it generally is broadly distributed across the Company's product lines as well.

Kim Watkins – Citi

Interesting. One of the areas that’s a little bit weaker is Fed. And I think the guidance on the Q2 call was that there was a conservative outlook, quote unquote. And a little unusual, because the September quarter is fiscal year for Fed.

Ernie Maddock

Sure, sure.

Kim Watkins – Citi

So, you typically expect a little bit stronger quarter.

So, what have you seen in Fed, specifically? And does the sluggish the Fed demand remain an overhang for the next few quarters? And is this the new normal with sequester? Or do you think that you expect that to pick up?

Ernie Maddock

So, what we indicated on the call was we would still expect a slightly stronger Q3, but that from a seasonal range perspective we might be at the lower end of the range. So, typically for the Company, Q3 would represent a high teens into low 20s proportion of government spending. And so, we think there's a likelihood that we’ll be at the lower end of that range, as opposed to the upper end of that range. So, sequentially up, but perhaps not up as strongly as it has been.

Relative to the specific indications we are seeing, it's really sort of a tale of two cities. Certain agencies and other affiliated entities are progressively more optimistic, and we are continuing to close business. Other agencies are literally waiting for the funding. With the project list still very strong, the opportunity for the Company is strong, but it really is likely going to boil down to an issue of funding.

So, really no specific trend even developing through the quarter. But still, the thing that gives us confidence is the fact that the projects are still there; the opportunity is there; people are waiting on the funding.

Relative to is this the new normal? I think we'll all have to wait and see. I mean it really has to do with a lot of the gridlock that we're seeing and we’ll see after we get through this year end, whether there are more fiscal cliffs and the threat of these things. But hopefully politicians will understand how damaging that is overall. But if history serves as any lesson, it suggests that maybe they won't quite get there as fast as we would like them to.

Kim Watkins – Citi

Okay. I don't want to leave international out of this. Europe, Asia – could you talk to those markets and what you're seeing in the demand environment?

Ernie Maddock

Sure. Both of those markets have been doing relatively well. And, obviously, in terms of market share growth opportunity for the Company, Asia is probably the strongest area where we have the chance to grow.

So, on a relative basis those areas are growing. The economy there is growing stronger. If we are successful in broadening our penetration and increasing our share, that would provide a nice growth trajectory.

Europe, too, has been a pretty consistent and strong performer. And so, while neither of them is, I would say, operating well outside of the normal ranges that we would have expected, we still continue to see strong growth in those areas, as well.

Kim Watkins – Citi

Okay. OPNET specifically is an area that you mentioned that there are opportunities…

Ernie Maddock

Yes.

Kim Watkins – Citi

For improvement. Last quarter, OPNET missed the low end of guidance after beating guidance in Q1, and Jerry talked about the sales integration process taking longer than I think initially the expectation was it would only take a quarter. How did the sales and compensation structure of OPNET employees change in the June quarter when it was integrated into the Riverbed structure? So, if you can just talk through that. And what took longer than expected? With hindsight being 20/20, what could you have done differently?

Ernie Maddock

I think the thing we would have done differently in hindsight is sort of set a different expectation. It is very typical for an integration of a sales force to take six to nine months, and certainly, we would expect ours to fall well within that range. The idea that we were going to be able to achieve that in three months was probably a little bit optimistic on our part.

So, what actually got done in the June quarter was what I would consider to be the mechanical pieces of the integration. So, people were assigned to their new leadership regions. Obviously, OPNET existed as a standalone sales force. Riverbed already has a highly integrated sales force. So, it’s a matter of taking those folks who were specialized on those application and network performance management products and finding a way to have them work together with the large Riverbed sales force that is primarily focused on the customer relationship and the sales of the Company's generalist products and really learn to work together in a new way.

So, what is taking longer, as you might imagine, is just that human interaction. People are resistant to change sometimes. And in this particular case, when you move from being a person, who has the primary relationship with the customer to being an important but still supporting member of a larger team, who is now trying to serve a broader set of needs in the customer base, that is not always the easiest adjustment to make.

So, it's always the change in human beings and helping people change their behavior that takes, I think, a little longer than we might think. It’s the mechanical things that are quite easy – assigning quotas, assigning new management, inculcating new folks into the Company's governance systems, et cetera, et cetera. And then, the real change begins, which is the change of minds and the change of hearts.

Kim Watkins – Citi

Okay. And then just to be clear, you said six to nine months. So, you expect to be through with the sales integration in…

Ernie Maddock

Well, we think the substantial part of the integration will be done by the end of this quarter. I think both Jerry and I commented that we were optimistic relative to the OPNET business that we would see momentum picking up as we exited the year.

And that was a function of tracking the progress on that integration; getting that thing settled down; and then seeing late third, early fourth quarter as the time when we move out of that state of being a little more inwardly focused, which you tend to do during an integration process, and actually taking advantage of a very strong core sales force, as well as a great specialist sales force and some terrific products, to begin to build that momentum back.

Kim Watkins – Citi

Okay. So, just back on the OPNET miss – I mentioned the Q2 revenue miss. What extent was this a function of the macro environment? Because that is very significant for OPNET. It's about 30% of revenue, if I remember correctly.

Ernie Maddock

I would say it's more a function of the Company's relative newness with that product set and how we derive a forecast than it was any particular sector or region. So, as you might imagine, when a company sells as much product as we do to as many different customers, you have to develop a fairly rigorous forecasting methodology. There has been one in place for Riverbed products for a long, long time. The Company has a great track record of meeting expectations.

On the OPNET side, that methodology had been applied for the first time in the April quarter. We had less experience with it. And those who had more experience with OPNET sales were, in fact, much more adamant about a higher level of performance. And so when you come down to providing an indicated range on that April call for the June quarter, you really were relying on a blend of inputs that had less quantitative and statistical foundations than we have for all the other product sets of the Company.

So, the reality was it was a blended effort. We fell a little short to that blended effort. But to point to a specific vertical or to a specific reason I think would be a little bit premature. I think if anything, the fact that we had such a strong Q1 and that we beat the indicated range there would be the biggest anecdotal factor I would point to.

Kim Watkins – Citi

Okay, so almost a forecasting…

Ernie Maddock

Yes.

Kim Watkins – Citi

A general forecasting issue.

So, how did the – that brings up an interesting point. How are the sales cycles different for the OPNET product set relative to the core Riverbed solutions?

Ernie Maddock

Well, even within Riverbed as a ex-OPNET, you have a series of products whose forecasting and sales cycles to be very quick. So, Steelhead product line probably is the most well dialed-in, all the way up to the Cascade product, which looks actually a lot like the OPNET product. So, it's a little bit more complicated sale. You usually involve some professional services partners; it involves a longer set of discussions with customers.

And so, really, we do have some experience at that end of the scale, and it was that sales force that we combined with the OPNET sales force to effectively transition to what we're calling Riverbed performance management. So, we would expect over time that piece of the business will continue to take – have a longer sales cycle. We'll likely be distributed through fewer partners and tend to be among some of the Company's larger sales because of the product line itself.

Kim Watkins – Citi

Can you distill that into months, or quarters, or some kind of metric? Because we like numbers.

Ernie Maddock

Sure. Well, I would say as we see the pipeline rebuilding now – so I mentioned that we think we have sort of gone through the roughest part of the sales force integration. One of the ways that you can measure that is how many proof of concepts do you have out with customers? In essence, how many customers have expressed at least enough interest in the product to be willing to invest time, energy, and effort using it, qualifying it, understanding it?

We sort of bottomed with that sometime during the June quarter, and we see that pipeline rebuilding. As we see that pipeline rebuilding, we think that that's certainly one of the reasons why we have some level of optimism coming out of 2013 into 2014. So, those things can take – frankly, for a new customer, there can be things that are worked on for a couple of quarters. If someone has used the product before and is putting it into a broader distribution in a new location, it's obviously much faster.

Kim Watkins – Citi

Okay. So, back to the integration process. The sales piece of it we discussed; there's also the back-office integration of OPNET.

Ernie Maddock

Sure.

Kim Watkins – Citi

When do you expect that piece of it to be complete? And what are these significant tasks that are part of the integration process there? And then, once that is complete, what benefits do you expect for the combined Company?

Ernie Maddock

So that piece is complete. It was completed by the end of the June quarter. So, we're now on one ERP system. We're running all the opportunities through our opportunity tracking and identification system. We’re on one set of compensation systems; one set of benefits.

So, a lot of what most people consider to be the back-office work was actually planned and executed during Q2. And we are, in fact, during this quarter, beginning to see some of the synergies that you would expect to see. So, obviously, you have one public company expense. You have fewer finance people who need to be involved. As we rationalize more of the IT systems, you will see more traditional benefits there associated with those sorts of things.

So, that work is substantively behind us. We are just doing some cleanup, and we expect to have that totally off the docket by the end of the year.

Kim Watkins – Citi

Okay. You touched on this briefly, but Riverbed has talked about plans to launch joint Cascade OPNET products. So, what is the timing and road map for these products? Then, how do you prevent a sales pause in advance of the new solutions being released to the market?

Ernie Maddock

So those – that integration was not very substantial. And it's, in fact, done. And it’s been released into the analyst community.

And one of the ways we are working hard to make sure there is no pause is to make them interchangeable. So in that sense, you have a migration path from one set of products to another. We're going to continue to support both sets of products, because they do, essentially, offer some very unique functionality between them.

But there was not a significant amount of technical integration that would have created that pause. And don't forget, outside of the US, it is totally greenfield, because there was not any substantial OPNET presence outside of the US. And so, there is more a momentum building there than there is the opportunity for pause.

Kim Watkins – Citi

Yes, okay. Well, that’s actually interesting, because one of the things I heard about when the acquisition was originally announced, prior to your joining, was that the idea was to take the OPNET products into Europe and leverage the Riverbed channel. Yet, when you look at the OPNET products, they are a very high-touch portfolio. So, I think near 50% of revenue is from services. So, how are you able to – how do you anticipate that process occurring of leveraging the channel and bringing those products into them?

Ernie Maddock

So, the Company has experience with the Cascade product. Because if you think about Cascade and the OPNET product line, they are not terribly different in terms of their complexity, the sales cycle, the fact that delivery methods are often best done with professional service and other services wrapped around them.

And so, we have had some experience and success with those Cascade products through some of our channel partners. And I say some. It is the significant few, who have the capability to penetrate those products in Europe, in Asia. We've made the progress with Cascade. We're very excited about the fact that partners are anxious to get their hands on the OPNET products as well.

Relative to the services component, I think it's important to understand that even core Riverbed services or support is something along the lines of 40% of the revenue stream. So, it is not so different, because much of that support is actually access to future enhancements in the software and the software capabilities. So, while there is some difference, it's probably not as dramatic as might appear just on first blush.

Kim Watkins – Citi

Interesting. Okay. Not to harp on this endlessly, but the other thing that I think is interesting about the difference between the Cascade solution and the OPNET solution is that Cascade was typically – it's a NPM solution that was typically sold into the networking team.

Ernie Maddock

Yes.

Kim Watkins – Citi

OPNET is an APM solution – application performance management and it’s sold to the application team.

Ernie Maddock

Yup.

Kim Watkins – Citi

Is this an issue for the combined sale? And how do you plan to adjust your go-to-market strategy to successfully sell both solutions, since it is a different purchaser within an enterprise?

Ernie Maddock

I think that is one of the most interesting strategic opportunities for the Company because if I throw in the Granite product, which is a storage buyer as opposed to a network buyer, it really points to the fact that the Company's product suite now is such that we need to notch up a level in terms of that IT infrastructure and our customer.

So, in a small-to-medium business, this might be a head of operations, who generally has responsibility across all of those. In some organizations, we’d be up at a CIO level.

So, one of the most significant efforts the Company is undertaking this year is that retraining of the sales teams and a great deal of focus and effort on ensuring that we can identify the right buyer within the customer, leverage that core relationship to have access to others within the customer with whom we can develop further deep relationships on either application performance management products; on storage products; et cetera. So, you have touched upon something that is a real critical focus of the Company right now.

Kim Watkins – Citi

Okay. We will keep an eye on that.

You touched on this a couple of times, and both you and Jerry mentioned on the Q2 call that you were confident you would see positive momentum for OPNET exiting the year. What gives you this confidence?

Ernie Maddock

One, you can't lose the core. These are good products. These are products – and in some cases, our industry-leading products. So the question becomes, how do you get people appropriately focused and motivated to sell the products?

Again, when you're in the midst of an integration and you are the subject of a lot of change – new manager, new territory, new quota, a lot of your time is spent thinking about and worrying about that. And, frankly, a lot of their time has been spent training on the complementary product, whether the Cascade team was training on OPNET products, or vice versa.

That is coming to a close during this quarter. And we are really focusing on lead generation, increasing the number of proof of concepts, and measuring and putting metrics in place across all of those things, which would in essence drive continued penetration and further opportunity for the product set.

And that has been reasonably successful. So, we are seeing – we are probably up 25% from the asymptote, the low asymptote where we were relative to number of proof of concepts and things.

So, if you see that momentum building, you see the sales leaders in all of our regions task the generalists with developing one legitimate, bona fide opportunity for an RPM sale. These are the sorts of very specific, measurable, quantitative things that generate opportunities.

And then, you have a specialist sales team who is very capable of leveraging those opportunities and bringing the business home. So, our optimism is based on some qualitative and much quantitative data that we have been tracking for a while.

Kim Watkins – Citi

Interesting. I just want to transition gears here and talk a little bit about the core Riverbed products.

Ernie Maddock

Sure.

Kim Watkins – Citi

The WAN optimization market has really – growth has really slowed. It grew 3% year over year in Q2. That is down from double-digit growth. How quickly do you believe this market can grow longer term? Does it remain a single-digit grower? And is there anything that you can do to reinvigorate growth in this market?

Ernie Maddock

Sure. WAN op as we know it in its current form probably is a single-digit growth sector. I think the thing that is very interesting and exciting for the Company is the use of Granite on top of a Steelhead box. So, we now need to move ourselves away from the mindset of purely WAN op.

The vision that Riverbed always had for the Steelhead product is that it would be on the bill of materials for a branch office. So, you buy a copy machine; you buy a Steelhead product; you buy a coffee machine; you buy whatever else you need. That becomes your branch office infrastructure.

And as it turns out, there were a number of opportunities for that to be part of the branch office infrastructure, and we certainly have customers where it is present in 100% of their branches. But we also have customers where it is present in 50% of their branches. And it's not as if they like Riverbed less; it's just that the technical need is lower in those customers than it is in others.

And so, the opportunity for Steelhead combined with Granite is in fact to really realize that original vision of being the branch office box. So, you have compute power; you have the WAN op that you need; you have some basic path selection capabilities; and you have storage. And you have the ability to have all your other servers become an integral part of that box.

So, if you think about what the Company is doing to reaccelerate the growth of that product line and penetrate more of those branch offices, it really is with a more complete solution that can fulfill what was essentially that original vision.

The second area that we are focusing on and taking a look at sort of is the other end of the market. So, is there a demand at a price point that is much lower than we have been able to sell product before that would represent a significant enough segment that it would justify investing time, energy, and effort in that sector?

So, say, a sub-$1,000 box that might have more limited functionality but be something that would be useful to organizations that have many, many, many limited functionality locations.

Kim Watkins – Citi

Just going back to Granite for a second – how large you think the TAM is for that product line? And could Granite eventually be similar in size or larger than the Steelhead product line?

And then, how much do those customers overlap? The way you just described it as the branch office product, it leads me to believe that it may be 100% overlap. But what do you see today? Does Granite provide an opportunity for Riverbed to up sell existing customers? Or does it provide an opportunity to expand the addressable market opportunity?

Ernie Maddock

It's a little bit of all those things. And I'm sorry, it's not going to be as crisp and clear. But it's not as if the customer base is completely the same.

So, Granite is essentially a way of projecting storage to a remote location, much as Steelhead accelerates applications, so that if you are in that remote location, your data and your applications appear to you to be local, even though they are not. So, if you think a little bit about that, you have two or three use cases of that.

So, relative to the TAM for Granite, that's a tough one to put your arms around, because you would argue that the TAM is all the storage in all the branch offices. And that is an incredibly huge number; that is well beyond where the product is likely to get penetrated for the next couple of years. So, rather than throw out another massively large number and then come back in a few years and discuss why it is we're not penetrated all of that – but that is sort of the market we are aiming for.

And again, I think about Granite on top of Steelhead as replacing server and storage dollars in a branch location. And that is together a multi-billion-dollar market. And to do that, you have to have that complete solution, which is what we're focusing on relative to making sure that all of the capabilities are together in that box to be a legitimate contender for that branch office solution.

The other interesting play that Granite has today, which is less economically focused, is the fact that for many CIOs who are confronted with the challenge of storing data in places that they'd rather not store it.

So, for example, we have a client who is a large engineering company who does business in all kinds of places that they don't want their data to exist and be available. They use Granite as a solution to project that data, make it available to this local employees, while at the same time having the safety of having that core data back in the core data center.

So, at the end of every business day, that storage essentially disappears. So, there are some noneconomic incentives and noneconomic drivers that customers have for taking a look at Granite, in addition to being a pretty compelling economic argument if you are looking at a branch office box replacement cycle.

Kim Watkins – Citi

Okay, thanks. That is really interesting. I'm going to ask one more question and then open up to the audience. So, you can start thinking about those questions.

One other thing I wanted to ask relative to Steelhead is the competitive environment. Cisco recently announced plans integrating with their WAN optimization to their ISR-AX router. Have you seen any changes in the win rate since Cisco took this step? Or could Cisco be bundling WAN op, and then you just wouldn't even see the deal? Is there any evidence either way that you see in the market?

Ernie Maddock

So, we measure what percent of the deals we think we see. So we measure all of those things. And, so far, we haven't seen a very significant change.

It's hard to tell, when you look at it over a quarter's period of time, whether you're seeing a trend or no trends. But essentially, there has been nothing significant – in fact, nothing even insignificant we can see that suggests that.

So, one of the best expressions I've heard relative to this is old wine in new bottles. So, it is not a different product; it is a bundling marketing strategy. The reality was and is that Cisco has about 20% of the market, give or take; Riverbed has about 50%, give or take. And if you are a customer who needs the capabilities that Riverbed provides, you don't really have another significant solution. And if you have very limited capabilities, you probably didn't go down the Riverbed route to begin with. So, without a change to the basic product competitiveness, we wouldn't expect over time that a marketing or bundling strategy was going to – would significantly change the playing field.

Kim Watkins – Citi

Are there any questions in the audience? Okay, I will continue to go on.

We have a couple of questions that we are asking all the companies that are attending the conference, and I wanted hit on those. One is use of cash. Riverbed issued debt for the first time with the OPNET deal. So – and you’ve also been pretty active with the new share repurchase plan.

Ernie Maddock

Yup.

Kim Watkins – Citi

Can you rank your intended use of cash between – I'm going to throw it in there – dividends…

Ernie Maddock

Yup.

Kim Watkins – Citi

Buyback, M&A?

Ernie Maddock

Dividends are something interesting and that we would be oriented to, but I certainly think for the Company where we are, probably something that is more on the longer-term horizon than the shorter-term. Certainly, we are very interested at the current price point in repurchasing shares.

If we allocate money essentially between that and the repayment of debt, share repurchase is going to take the day. In this relative price range, I think as we either get closer to the maturity date of the debt or see a share price in that mid-$20s, we would probably be less – be more indifferent toward those two uses. And certainly above that range focus on debt repayment. And then, of course, as the debt matures, we have to be mindful and plan for that, as well.

Kim Watkins – Citi

Okay. Check again for questions out there? None?

Okay. The second one that we're asking all the companies is visibility. We touched on this a little bit, but can you describe your visibility versus what you saw or the Company saw one year ago, one quarter ago? And, do you think that visibility is getting better or worse?

Ernie Maddock

Well, certainly, if we go back a year, I think people would say that those were great days, because it was before the sequester and before all of these other things that have made us all a little bit wary. But we are seeing things generally on a slow, steady upward improvement trend.

All other things being equal, barring any significant perturbation in the federal sector, things feel as if they are tooling along and just getting progressively better, although by very, very small amounts. But we're certainly not seeing any significant negative indicators.

Kim Watkins – Citi

Okay. And, we may have a question up here. All right.

Question-and-Answer Session

Unidentified Speaker

You’ve talked about the Steelhead business by itself being a single-digit grower, 3% being last quarter, and that the Granite business will be enhancing that. So, are we talking about increasing it to the high single-digits with Granite? Or are we talking something in the double digits area? Because it seems like the integration, issues are shaking themselves out. So, the real question is what is the growth of the entire corporation going forward?

Ernie Maddock

Yes. So, specifically relative to Steelhead and Granite, we think that it definitely can move up into the high single-digits and potentially low doubles. And then, if you get a bit of clarity around federal spending and maybe this continued improvement in the macro, that's where we move into that sort of low- to middle-double-digit range. But I think the reinvigoration of the Steelhead product line with Granite and essentially the realization of this branch office box, we would be very pleased to see over the course of 2014 moving up into that high single-digit growth rate.

Kim Watkins – Citi

Any more audience questions?

Okay. The third question that we are asking all the companies and I wanted to ask you about was productivity gains. How would you describe your opportunity for operating margin expansion versus one year ago? One quarter ago is probably a little bit more relevant. You think it's better, or worse, or unchanged?

Ernie Maddock

I think we are all committed to expanding the operating margin of the Company. So one of the things we're working on is making sure that our OpEx grows less than our revenue. This quarter was right on the cusp, so if we meet the midpoint of our guide we're going to see operating expense go slightly below revenue. We hope to accelerate that gap, so as a longer-term objective have OpEx at half the rate of revenue growth.

And if you look at that and we are successful in doing that over the course of, say, 4 to 6 quarters, not too difficult to see the Company get back into that upper 20s range, which, in my mind, is completely achievable for the Company.

So, whether we will get to 30% or not I think is going to depend on the mix, and the quarter, and momentum. But certainly, over the course of 2014 you'd expect to see significant progress from where we are today, which is right around 22%, progressing up through that range.

Kim Watkins – Citi

And you mentioned it’s mix. Is there – are some products more profitable than others? Or is that a regional comment? Can you just clarify that?

Ernie Maddock

The mix comment, related to the fact that some of our products are sold on a subscription basis, some are sold at net revenue fully in quarter. And so, really it is a statement that says, presuming the mix of the Company doesn't change dramatically from where we are today, you'd expect to see it. And, we don't expect to see that mix change dramatically.

Kim Watkins – Citi

Okay. One of the things – you just reminded me about the software element and the Stingray virtual ADC product. How is that differentiated from virtual ADCs we see from companies like Citrix, NetScaler, and F5? And how large could this revenue opportunity on this product be longer term for Riverbed?

Ernie Maddock

We think the opportunity can be significant. We haven't quantified that yet. We will be in the process of taking a look at doing that here over the next couple of quarters. But the thing that differentiates the product is the fact that it is fully designed for a virtual environment. So, it does not depend on custom silicon on a piece of hardware to enhance the performance that it delivers to its customers. And that is a very unique value proposition in the marketplace right now.

And we are very pleased at both the number of different customers; but also, as we have a chance to talk more about the scope and scale of the customers who are selecting this as a solution, it is among the largest companies in the world for the most critical and widely recognized applications that you might see. So, the differentiating component of that product is the fact that it was fully designed to operate in that virtual world.

Kim Watkins – Citi

Do you think this could grow to 10% of revenue at some point?

Ernie Maddock

I do think it could grow to 10% of revenue over time.

Kim Watkins – Citi

Okay. Interesting. Time for probably one last quick one, if anyone has one out there. If not, thank you so much, Ernie, for speaking with us.

Ernie Maddock

Thank you.

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