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Riverbed Technology (NASDAQ:RVBD)

Q1 2014 Earnings Call

April 29, 2014 4:30 pm ET

Executives

Renee Lyall

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

Ernest E. Maddock - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

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

Michael Saloio - Oppenheimer & Co. Inc., Research Division

Jason Ader - William Blair & Company L.L.C., Research Division

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

Kimberly A. Watkins - Citigroup Inc, Research Division

Paul Silverstein - Cowen and Company, LLC, Research Division

Natarajan Subrahmanyan - The Juda Group, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Sanjiv R. Wadhwani - Stifel, Nicolaus & Company, Incorporated, Research Division

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

Brian T. Modoff - Deutsche Bank AG, Research Division

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Eva Leung

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Woo Jin Ho

Operator

Good afternoon. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Riverbed First Quarter 2014 Financial Results Conference Call. [Operator Instructions] Thank you. I will now hand the call over to Miss Renee Lyall, Director of Investor Relations. Please go ahead.

Renee Lyall

Thank you, Jay. Welcome to Riverbed's conference call for the first quarter fiscal 2014. Here with me today are Jerry Kennelly, Chairman and CEO; and Ernie Maddock, Chief Financial Officer;

A press release detailing our first quarter result was distributed today at approximately 1:05 p.m. Pacific Time over Business Wire. The press release is also available on our website at riverbed.com. This conference call is being webcast live at riverbed.com/investors, and will be archived on our website for the next 12 months on the Quarterly Earnings and Events pages.

Our discussion today will include forward-looking statements, including statements regarding adoption of our products and our Application Performance Platform, market share gains, our forecast for operating performance, share repurchase activities and cash generation as well as other statements about the company's expectations, beliefs and strategies.

Forward-looking statements are only predictions and involve risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in our quarterly release and described in detail in our SEC filings.

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

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

Jerry M. Kennelly

Thank you, Renee, and good afternoon, everyone. The first quarter results we are reporting today show a continued execution on our operating plan. Our first quarter revenue was $266 million above the midpoint of our guidance. And earnings were $0.24 a share, $0.01 above the guided range. Year-over-year revenue growth was led by WAN Optimization and strength in enterprise and international sales. And while Q1 has a challenging year-over-year comparison for Riverbed Performance Management, we see an expanding pipeline and expect to show year-over-year revenue growth for each subsequent quarter this year and for the full year.

This quarter, we continue to receive industry recognition for our innovative products that solved the strategic challenges our customers face everyday in delivering applications and data at global scale.

In Q1, Steelhead was awarded InfoWorld Technology of the Year for the eighth time running and Granite won in the second consecutive year. In addition, our cloud storage product, Whitewater, was named Product of the Year in the Backup Category by Storage Magazine. Every Riverbed product is highly regarded by the industry. Gartner has positioned our products in the Leaders Quadrant for WAN Optimization, applications performance management and network performance management. Additionally, Gartner has positioned Stingray in the Visionaries Quadrant for application delivery controllers. We deliver and sell best-of-breed, cutting-edge products.

During the quarter, we expanded the reach of Steelhead and introduced a purpose-built Steelhead appliance for the data center-to-data center replication market. The Steelhead DX 8000 delivers up to 60x WAN performance acceleration and up to 99% bandwidth reduction. With the DX 8000, our customers can now transfer and protect more data more often with less risk at a lower cost.

We also announced updates the Granite software, a new, faster branch appliance, new, higher capacity core appliances and we rebranded the product as SteelFusion. As the new name suggests, SteelFusion is a convergence of brand servers, storage, networking and virtualization infrastructure into a single solution that reduces the average time to provision and recover branch services from hours to minutes.

Riverbed SteelFusion builds upon and extends beyond Steelhead and is the first branch converged infrastructure product that centralizes data in the data center and delivers local performance to the branch.

Branch converged infrastructure is a $4 billion market, and we are very optimistic about the opportunity for SteelFusion.

We are also encouraged by what we are seeing within our Performance Management business. Application and network performance management address the growing need companies had to gain better and deeper visibility into the complexity of today's global IT environments, across the network, into the application layer and through to the end-user experience.

The application network performance capabilities and the Riverbed Application Performance Platform are helping to drive more strategic and relevant conversations with senior IT executives and, in turn, drive larger deals.

We are seeing broader distribution through our channel partners as well as an increase in non-U.S. sales. This is encouraging progress and consistent with our rationale for the acquisitions we have made to expand our product portfolio to deliver a broader and more strategic value proposition to our customers and gain share in the $11 billion application performance infrastructure market.

As we look at Riverbed as a company delivering a comprehensive application performance platform, the number of customers purchasing multiple Riverbed products compared to last year has increased.

A good customer example is MTC Australia, who deployed Steelhead Cloud Accelerator and Stingray for its cloud-first strategy, accelerating the delivery of Office 365 up to 300% and reducing bandwidth upgrade costs by 2/3.

Another example is a large German consumer goods company that is migrating to Office 365 from Lotus Notes, consolidating to less than 5 data centers globally and adopting an outsourced model. This company has purchased Steelhead, SteelFusion and Riverbed Performance Management to achieve their long-term infrastructure goals and meet important service level agreements.

Riverbed is uniquely positioned with our Application Performance Platform to provide our partners and customers a real competitive advantage by giving them freedom over distance and location, so that business objectives, not technical constraints, determine how applications and data are delivered.

In a world where nearly every business runs on applications, Riverbed improves business performance by improving application performance. We see tremendous opportunities ahead of us and we continue to evolve our marketing and sales strategy to take full advantage of this opportunity.

In positioning our portfolio of products as a platform, we recognize the need for our product names to reflect that they are part of an interoperable system.

As a result, we are rebranding our products this quarter with new names. The new names draft off our first and longest standing product, Steelhead. Each product name will begin with steel, a word that signifies the strength in infrastructure and recognizes Riverbed's heritage.

In the market, in general, the new steel based product names portray Riverbed as one company selling one platform for a price of multiple products.

And for customers, the consistent naming structure reinforces how our products work together as an interoperable system to provide greater business value.

Our new product family names are as follows: Steelhead will remain Riverbed Steelhead, the brand name synonymous with WAN Optimization. The new name for Granite, our branch converged infrastructure product, is Riverbed SteelFusion. The new name for our Stingray product in the virtual application delivery controller market will be Riverbed SteelApp. Whitewater cloud storage gateway will be Riverbed SteelStore. And the Riverbed Performance Management suite of products will take the overall brand name of Riverbed SteelCentral.

We've already introduced the new branding to our industry and channel partners and the new names will be formally launched to the market in mid-May. These new names will not impact how we report our financial results for our 2 primary product families, application acceleration and performance management.

The renaming of the product portfolio is another important step in being recognized as a platform company selling a comprehensive suite of products to enable Location-Independent Computing that ensures applications performance as expected, data is available when needed and performance issues are detected and fixed before affecting the end user.

With that, I will turn the call over to Ernie to discuss our first quarter results in more detail and provide the guidance for the second quarter.

Ernest E. Maddock

Thank you, Jerry. Good afternoon to everyone and thanks for joining us on the call today. As a reminder, the income statement data presented today is on a non-GAAP basis while the balance sheet and cash flow data are predominantly GAAP.

Riverbed's first quarter revenue was $266 million, above the midpoint of our guidance and up more than 5% compared to last year.

First quarter product revenue was $150 million or 56% of total sales, while first quarter support and service revenue was $116 million, representing 44% of total sales.

Q1 application acceleration revenue was approximately $204 million and 77% of total revenue.

Within Application Acceleration, WAN Optimization, consisting of Steelhead and SteelFusion, was $190 million, up 10% year-over-year. While SteelApp ADC revenue was $13 million, up 7% compared to the first quarter of last year.

Riverbed Performance Management, now named SteelCentral, contributed approximately $61 million or 23% of total first quarter revenue. SteelCentral revenue was down 9% compared to Q1 of last year. And as we have said before, Q1 2013 was a very strong quarter for the former OPNET-related products as it represented the close of the former company's fiscal year and the final quarter of its compensation plan.

This creates an uneven year-over-year comparison for just this quarter. As Jerry said, we've been making strong progress with this product line and believe we are on track to grow revenue faster than the overall market for these products.

Turning to distribution. 88% of our first quarter revenue came from indirect channels while 12% was sold direct. 2 distributors contributed more than 10% to revenue in the quarter, with Arrow at 21% and AppNet at 14%. We had no 10% end-user customers in the quarter.

Looking at geography, the Americas represented 61% of total revenue, EMEA was 26% and APJ was 13%.

Turning to verticals. Our largest contributors remain consistent with financial services, government, manufacturing, professional services and technology each contributing more than 10% to total revenue during the quarter.

Our overall gross margin was 78.9% in Q1, including product gross margin at 82.1% and support and service gross margin at 74.7%.

Our services revenue was slightly more skewed towards professional services during the quarter, which caused our services gross margin to be slightly below previous quarters.

Total operating expenses for the quarter were $152 million, just below our guided range, as we continue to carefully monitor overall levels of operating expense.

Our operating margin for the quarter was nearly 22%.

March quarter interest expense was just under $3 million and our tax rate for the quarter was 26.9%.

Our current tax rate does not reflect any potential impact from the Congressional extension of the R&D tax credit. Should the tax credit be renewed, we would expect a tax rate closer to 25%.

Net income for the quarter was $40 million or $0.24 per diluted share, just above the high end of our guided range on a fully diluted share count of 165 million shares.

We ended the quarter with approximately 2,600 employees, relatively flat with Q4.

Moving to the balance sheet and cash flows. We exited the quarter with total assets of almost $2 billion and cash and investments of $560 million, up from $503 million 1 year ago.

During the first quarter, we made $3.8 million principal repayment towards our debt, and the debt balance as of March 31 was $521 million.

Inventory totaled $21 million at the end of the quarter compared to $25 million at December 31, with the reduction being primarily attributable to improvements in operational practices.

Deferred revenue was $325 million, up 4% compared to the fourth quarter and 10% year-on-year.

Day sales outstanding were 34 days.

Cash flow from operations was $45 million in the first quarter and free cash flow was $30 million.

Capital expenditures were $15 million, with the majority of the expense related to the final phases of the buildout of our new headquarters office in San Francisco. As we have mentioned for some time, we expect capital expenditures to be above average due to this buildout and to peak in the $20 million to $25 million range in the second quarter before returning to a sub-$10 million quarterly level toward the end of the year. Our new facility will allow us to accommodate anticipated future growth with costs that are significantly favorable to current market conditions.

During the first quarter, we repurchased approximately 1.2 million Riverbed shares for $25 million at an average price of $20.23 per share. $363 million of the recently increased repurchase authorization remains and we continue to be committed to improving shareholder value both by funding the growth of our business and returning cash to shareholders via share repurchases.

Turning now to our outlook for the June quarter. Our non-GAAP guidance is as follows: total revenue is expected to be in the range of $274 million to $280 million, up between 7.5% and 10% over the June quarter of 2013.

We are currently tracking to the plan that we outlined last November.

Gross margin is expected to be between 78% and 79% and operating expenses are expected to be between $152 million and $155 million with an operating margin of approximately 23%.

The tax rate is expected to be unchanged, pending the extension of the R&D tax credit, and we are guiding our earnings per share to be between $0.26 and $0.28 based on 166 million diluted shares outstanding.

I'll now turn the call back over to Jerry for his closing comments.

Jerry M. Kennelly

Thank you, Ernie. Before we open the call for Q&A, I'd like to reiterate that the board and the management team of Riverbed are committed to driving shareholder value through revenue growth, improved profitability and balanced capital allocation.

To that end, we will continue to execute on our key operating objectives: to drive revenue growth that exceeds market growth rates across all of our product lines, to leverage market share gains to generate service and support revenue growth, to manage operating costs to grow at a slower rate than revenue growth, to deliver EPS growth that well exceeds our revenue growth and to use our strong cash flow to support our business's growth and continue our practice of returning cash to our shareholders via share repurchase.

We appreciate the support of our customers, our employees and our shareholders as we continue to execute our strategy and our operating plan.

Operator Jay, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question on the line comes from Bill Choi with Janney.

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

So it looks like you're on track towards, certainly, controlling the OpEx. How do you feel about that 10% illustrative topline growth that you've outlined for the full year? And how are you seeing kind of the enterprise versus government dynamics that created some challenges last year? Are you seeing the government kind of come back? You had mentioned enterprise certainly strong, but any color on government will be helpful.

Jerry M. Kennelly

Yes. So we think we are on track to that illustrative 10%. We give our guidance one quarter at a time. But the second quarter guidance we've given, we expected these Q1 results. And at this time, we're on that track. Enterprise continues to be strong both in U.S. and in Europe. We had a nice government worldwide. Now the federal part of the government is our biggest part. The federal budget impasses between the 2 parties of Congress were basically resolved mid-February by the time they got both the budget extension and the spending cap resolved. So we're cautiously optimistic that Q2, Q3 will be nice government quarters in total and ties into our full year outlook.

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

What exactly was the government percentage in the quarter? I missed that.

Ernest E. Maddock

Government was right about 15% in the quarter compared to a little higher than that, maybe 17% in Q1 of 2013. And don't forget that Q1 of '13 had that very strong OPNET quarter, which had a very significant government component. So net of that, probably about flat.

Operator

Your next question comes from Ittai Kidron with Oppenheimer.

Michael Saloio - Oppenheimer & Co. Inc., Research Division

This is actually Mike Saloio on for Ittai. I was wondering if you could provide us any metrics around Microsoft Office 365 deployment and what kind of traction you're seeing there with Cloud Steelhead?

Jerry M. Kennelly

Yes. So it works 2 ways. People use the Steelheads in their core network in their own branch offices for Steelhead to connect to Office 365 either by putting their own Steelheads in a data center close to Microsoft or by using the -- one of the services we do with folks like Akamai, that continues to be a fundamental drive in value prop of the company and we expect it to continue that way. We're seeing sort of mass conversion to Office 365 worldwide by the biggest companies in the world. In fact, Riverbed itself is now signing up to become an Office 365 customer. It's just a secular trend that people are doing. It makes so much sense. It's probably the driving factor in the SaaS world right now and we continue to benefit from it.

Michael Saloio - Oppenheimer & Co. Inc., Research Division

Okay. And then just as a follow-up. On the 10% topline growth guidance that you have given in the past, is there any change in the drivers to that guidance or, more specifically, is there any change to your outlook on the core WAN Op business? I think in the past, you mentioned something like 3% to 5% growth there?

Jerry M. Kennelly

There is no change. The core WAN Op was actually quite strong this quarter, it was 10% year-over-year. So the core value proposition of WAN Op is still very powerful. The customers love the product. It still plays into every secular trend, everywhere the market is going, people doing cloud processing of B2B and applications being further and further away from the knowledge workers that use them, and the value prop remains very strong. So we're not ready to raze it, but we're still sticking with it.

Operator

Your next question comes from Jason Ader with William Blair.

Jason Ader - William Blair & Company L.L.C., Research Division

Jerry, I was hoping you could talk about the dynamics in APM, NPM market right now. And you acquired OPNET a little over a year ago now. How has the market evolved since the acquisition? What are you happy with? What are you unhappy with in terms of how you've executed and especially kind of some leverage you were hoping to get from the combined Cascade and OPNET product lines, and especially relative to some of the pure plays out there? You've seen NetScout just produced very strong numbers and you've seen some of the startups like AppDynamics and New Relic get a lot of buzz. So just more of a landscape question about that space. I think -- it's a bit of a hard space to understand for investors.

Jerry M. Kennelly

Yes, sure. So it absolutely turned out to be the right thing for us to do. It's one of the reasons that we're able to get the revenue diversified as strong as we have. I think WAN Op is now in the low 70s and we have a strong revenue story in the other areas. You have kind of to parse through the Application Performance business. It still has the 2 components, network performance management and then application performance management. Now to some extent, when we blended the businesses, you lose some of the visibility into that. But -- for instance, NetScout is very strong in the network performance management. There we think we have probably the strongest portfolio going, the original cascade product combined with the ARX product of the OPNET group, together works very well in that market. And we think the competitors are a little long in the tooth in the product that they're putting out there and that we have a fundamental advantage going forward and have a competitive advantage on the product level to take that more down there. The acquisition was announced, see, back in October 2012. The actual integration of it on a real basis began in April 2014 (sic)[ 2013 ]. So we fundamentally had that integration done by the end of September 2014 (sic) [ 2013 ]. So we really did the heavy lifting in just 2 quarters between April and September of 2013, I'm sorry, and we entered the fourth quarter of 2013 firing in all cylinders. And so, when you take and stuff a company of 700 people into a company 1,800 people and can pull it off in 6 months, it actually went pretty well. And you saw the results that we announced in the Q4. There's always some distraction when we do these things with the sales force, they have to learn the different products. We think that distraction is past us and that we're seeing the benefit of that now. The core sales force has been selling the network performance management product so long that they need less and less handholding from the specialist overlays. And it's really the APM part where you're go into the application, monitoring that, that really only requires a specialist at this point. So it's a business -- the core proposition that you can detect problems with the APM, MPM and fix the problems with the Steelhead and the acceleration technologies still holds water very well. We are seeing the benefit of taking this historical OPNET business from just being primarily business to getting real traction now in Europe and in Asia Pacific and also getting the first real traction, taking that product from a direct model into a channel model. You can see we've got the indirect -- the direct sales down to just 12% now. So we very quickly try to transition that business where there's leverage both geographically and through sales channels. So I think we're in good shape, I think it was a good acquisition, I think we did as well as anyone can do it. The timeframe -- there seemed to be a lot of impatience with our timeframe that I don't quite appreciate, but I think we did as well as anybody.

Jason Ader - William Blair & Company L.L.C., Research Division

What kind of growth rate do you expect with RPM, the Steelhead potential business, let's say, over a couple of years? Not to pin you down on a specific number, what kind of range would you say is reasonable for that business once you kind of get through some of the tougher comps?

Ernest E. Maddock

This is Ernie. We've estimated that the market itself is probably growing around 5% to 6% a year, and we've committed to grow 2 to 3x faster than that on a product basis.

Operator

Your next question comes from Jayson Noland with Robert Baird.

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

I wanted to ask about Granite or SteelFusion. How did things start 2014? I think this year, it was described as a potential breakout year for Granite. Any color you can give on the pipeline or seat deals will be great.

Ernest E. Maddock

This is Ernie again. So Granite continues to grow both in terms of customer accounts as well as market adoption. As Jerry mentioned, we had a very significant relaunch of the product with its new name on April 15. So we continue to be encourage. It certainly is helping overall WAN Op grow by that double-digit numbers that we reported this quarter. And at this course and speed, I think we're on track to our expectations for the year and so continued positive encouragement there.

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

Would Granite gross margin profile look comparable to Steelhead with volume, Ernie?

Ernest E. Maddock

It will, absolutely.

Operator

Your next question comes from Kim Watkins with Citi.

Kimberly A. Watkins - Citigroup Inc, Research Division

First thing I wanted to ask about is just the product gross margins, it looked elevated again this quarter. Like last quarter, I guess, last quarter I was under the impression that there was some [indiscernible] buys in there that lifted it. So could you comment on that, in the sustainability? And then I have a follow-up.

Ernest E. Maddock

Sure. So we were slightly below on a product gross margin basis in Q1 versus Q4. But as I mentioned in my prepared remarks, we had great inventory performance again this quarter. And part of that did have a positive impact in the product gross margin area. So we are aggressively working our way through that. There will come a time when it [indiscernible] and pokes out. But we think we have another quarter or so of work that we can do in that regard. So relative to sustainability, we feel relatively comfortable again given volume and mix that we're operating in a range that we can sustain, Kim.

Kimberly A. Watkins - Citigroup Inc, Research Division

In those 82-ish range, is that what you mean?

Ernest E. Maddock

Yes. Certainly, we need a little bit of running room here. So 81%, 82% is a reasonable thing to think about.

Kimberly A. Watkins - Citigroup Inc, Research Division

Okay. And then the other question I had is, Ernie, I think that you were at a conference earlier, maybe last quarter, and talked about Riverbed potentially considering entering the fiscal ADC market, where F5 is the largest competitor in that market. What are your latest thoughts on that? Why would that be attractive to you? And is there any additional investment that needs to go into the Stingray platform to address that segment of the market?

Jerry M. Kennelly

Kim, this is Jerry. It's a question of form factor. So we're not really changing our strategy or our technology in ADC. We think we have the leading virtual type of ADC, the virtual -- the leading Layer 7 ADC product, whereas the F5 product is more Layer 3 and 4. But there -- to get more traction in the enterprise part of the market, the enterprise buyers like the form factor of an appliance. And we like to sell to people the way they like to buy. We think we can get a bigger piece of that market that way. So toward the end of the year, probably Q4, we are intending to make the Stingray, now SteelApp, product available in an appliance form factor.

Kimberly A. Watkins - Citigroup Inc, Research Division

Okay. So essentially porting that software onto a standard industry here.

Jerry M. Kennelly

Exactly. Right now people just have to do it with their own port. Why not do it for them because it makes it easier.

Ernest E. Maddock

And to Kim's revenue question, we have contemplated the work necessary to do that in the prospectus we provided.

Operator

Your next question comes from Paul Silverstein with Cowen and Company.

Paul Silverstein - Cowen and Company, LLC, Research Division

Two quick questions, if I might. First on WAN Optimization. From a product revenue standpoint, would the growth rate be comparable to the overall growth rate in WAN Op?

Ernest E. Maddock

Yes.

Paul Silverstein - Cowen and Company, LLC, Research Division

All right. And secondly, with respect to the Americas growth and your comment about government and your comment that you saw good enterprise -- strong enterprise growth both in Americas and Europe. If we isolated out enterprise in the Americas, and I know you guys haven't, I don't think you've been giving the U.S. federal in a while, but if we isolated out the U.S. enterprise, what would the growth look like? Can you give us some -- if not a number, give us some harder indication of what that growth will look like?

Jerry M. Kennelly

Was it total enterprise?

Ernest E. Maddock

Your question is U.S. enterprise particularly or total enterprise?

Paul Silverstein - Cowen and Company, LLC, Research Division

U.S. enterprise specifically.

Ernest E. Maddock

Yes, we saw good performance on U.S. enterprise that was fairly comparable to the last several quarters of overall performance. We did have a very, very strong quarter in Q4 where it was a little bit higher. But in terms of the Q1 performance, slightly above the majority of 2013, with the exception of the fourth quarter.

Paul Silverstein - Cowen and Company, LLC, Research Division

So the real issue continues to be the U.S. federal government, which you indicated that you see picking up in Q2 and Q3 as well as through the balance of the year?

Jerry M. Kennelly

We would think so, yes. I mean we're finally -- people forget it was only last quarter, the December quarter, that the government was actually shut down the entire month of October and that the final budget resolutions were just made in mid-February. So hopefully it's behind us. Nonetheless, there's been quite a bit of government business.

Paul Silverstein - Cowen and Company, LLC, Research Division

Jerry, that said, and I recognize your reference to budget agreement, but when you look at the past 2 months, I assume that supports your optimism for the balance of the year in terms of the government business, the order activity you've seen over the course of March and April?

Jerry M. Kennelly

I mean, we did -- 15% of our revenue was government in Q1. So it's not dead by any means.

Operator

Your next question comes from Subu Subrahmanyan with The Juda Group.

Natarajan Subrahmanyan - The Juda Group, Research Division

I just wonder if I can relate it on the 10% kind of growth objective for the year. Can you talk about kind of the underlying assumptions in terms of RPM pickup in the second half of the year? And if you think for this year, WAN Op exceeds the 2% to 5% guidance that you have, kind of what the comp pieces would be? And kind of the second half versus first half, what are some of the factors that provide you some of the visibility are?

Ernest E. Maddock

We don't provide specific perspective on product line growth. We did outline more to you at our analyst day that we expected the -- each of our product lines to outgrow their respective markets by 2% to 3%. And we also outlined at analyst day that we felt that WAN Op was essentially a flat market, that we would see Performance Management in that mid single-digit range with our growth exceeding by 2% to 3%. The ADC market, the virtual ADC market actually is growing somewhere in the mid 20% range. And we would outpace that growth. And so, that was the general framework that got you to an overall growth rate of approximately 10%. And you can see throughout the execution of the quarter, we just finished a quarter where we were up by 5.3%. Our guidance for Q2 is between 7.5% and 10%. So we are tracking to the overall plan that we've outlined last November.

Natarajan Subrahmanyan - The Juda Group, Research Division

I was just trying to understand, there were specific factors on RPM especially which give you confidence on a year-over-year growth going into the second half.

Ernest E. Maddock

Sure. So they're pretty much unchanged from what they've been for a while, which is the fact that we acquired a company that was predominantly U.S.-based and predominantly sold direct. And we have the ability to take that product and leverage it globally as well as through our channels. And so, you saw the percentage of the total company sales this quarter increase through the indirect channels to the high 80% range, and that has been a steady increase over the course of the last year as we have moved those RPM products into the channel. So predominantly, it will be those 2 factors. One, leveraging it internationally and moving it through our channels.

Operator

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

Mark Sue - RBC Capital Markets, LLC, Research Division

Jerry, we're 5 to 6 years into kind of the product cycle, so just trying to see the bounce that you're getting in WAN Op at the moment, would you say some of that is a refresh cycle? Are you seeing some growth from existing customers upgrading their products or are you also seeing new customers actually for the WAN Optimization cycle? And then also, as you look towards a platform approach leveraging your large install base, what are some of the customers are -- what are they saying, are you getting some volume in terms of Riverbed as a platform for service delivery.

Jerry M. Kennelly

Yes. Thanks, Mark. So it's a mix of things. Certainly, there is some upgrading of all the models going along. It's a nice part of the business. I won't say it's the biggest material thing, but that certainly helps. The continued general move toward cloud computing means that people are -- want more both compression and protocol acceleration across longer distances, and we're seeing some deeper penetration to long-time customers. You have new companies that are trying to embrace SaaS and cloud computing for the first time who realize they don't have the performance to make it work properly coming to the table. So we continue to have nice new customer acquisition. The global economy is frankly up a bit. And we benefit from that. And as you play back the tape, 5 or 6 years as you say, 2007 was great, 2010 was unbelievable. But when the economy was down in 2008, 2009, we slowed down a bit, we're still at midteens growth at that time. And so, you're seeing the same thing that the recession of 2012 is sort of getting behind us, 2013 started to perk up. And there's a stronger world economy out there, which makes more demand for our products. Some of the new product offerings in WAN Op, with emphasis on SaaS and our new sort of direct-to-net and Path Selection type technologies that let people choose how they control the path of their traffic either out to the broader Internet or under captive MPLS networks, is getting a good reception. And things like Office 365, salesforce.com, all these kinds of offerings are interesting. And so, there's a good, strong economy. There's a world where people are doing more and more applications and data work across vast distance, and that requires our technology to do it right. You tie into that the fact that these big complex networks -- I really came to appreciate they're like black boxes to the poor souls who have to manage these things, the network managers and even the CIOs who get these endless phone calls that their network is slow and they've got 2,000 routers and 3,000 branches and 15,000 servers running 3,000 applications on a global network and they try to troubleshoot that, it's a nightmare. And so, the type of technologies we have both in the MPM and APM space are becoming very critical of these people. And they get a lot of interest, it helps expand our ability to sell all the products. We get more attention at the higher level from the customers. We get some pretty good-sized purchase orders on the whole performance monitoring side of the business. So it's just -- it's kind of a general virtuous cycle going on of where computing is going, global computing is going, the way it's done, the strength of the economy and the strength of the portfolio that ties into what people want to accomplish in running their IT networks worldwide.

Mark Sue - RBC Capital Markets, LLC, Research Division

That's helpful. And then Ernie, very quickly, your free cash flow metrics look very good. I would imagine that they're only going to get better as we progress through the balance of the year, maybe to the tune of almost $200 million a year. Would you consider -- would the company consider additional shareholders returns in the form of a dividend now that the cash flow is very predictable and very healthy and efficient to the share repurchase.

Ernest E. Maddock

Given that we've got $500 million or so of debt and we have -- still have some level of volatility in the business, I would say that our short-term focus is going to be more around share repurchase and opportunistic share repurchase than a dividend. It's certainly not totally off the radar screen. But it is something that's likely a little further out than not.

Operator

Your next question comes from Sanjiv Wadhwani with Stifel.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Company, Incorporated, Research Division

Sort of broad level question, if you look at your 10% metric for the full year, it does entail a fairly healthy acceleration in growth rate in the back half of the year. And I'm trying to see sort of -- you look like -- it looks like you guys are fairly confident in getting there. Is that coming from RPM sort of doing better for the back half of the year, or will WAN Optimization outperform this year? Any color over there will be helpful.

Jerry M. Kennelly

So we -- we've always been a second half company in terms of strength, although nothing wrong with our first half. And we still feel that way. There's a lot to build in both Q3 and Q4. There's this power of Q4 that's always astounding every year as you get to the throes of compensation and pipeline and sort of the building crescendo of the business. But it's more than just that kind of seasonality, it's also the product portfolio we have, the releases that have just come out, the releases that we have planned and will be coming out and then the general direction of the economy. So that's our feeling, and I think it's sound.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Company, Incorporated, Research Division

Any color on specific areas that you think could accelerate in the back half, whether it's RPM or WAN Optimization?

Jerry M. Kennelly

I think they're both good. I think WAN Op with SteelFusion and the continued take-up of the -- so the NPM part of the business, where we are particularly strong, I think our chance to take some market share is pretty good there. I was thinking, we're through the integration, nonetheless with each passing day, it still gets stronger and stronger. And so, we haven't reached the steady state. People always -- they've heard enough, but they can learn more and they are learning more with each passing day, the partners learn more. Every month that goes by, we have a bigger sales force, a more experienced sales force, a bigger partner network, a more experienced partner network, a bigger install base of customers, a larger set of products to sell and all of whom are playing into the secular trends where computing is going today. So every trend speaks in our favor, combined with an improving global economy. So it just -- it feels good right now.

Operator

Your next question comes from Rod Hall with JPMorgan.

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

I've just got 2 actually. I wanted to see if you guys could comment on the Juniper relationship at all. I think some people have thought immediately that was a negative, the change they made to ADCs, and we weren't so sure, it seem like maybe it could go the other way as well. So I just wonder if you could give us your own take on what that means for your continued relationship with them? And then I also wanted to see, now that you guys have -- I guess now what we'll call it Steelhead Fusion under your belt for a little bit, do you still feel like you've got the right distribution approach for that? I mean, you're out making a sale that is still kind of a new idea for a lot of branches. And just wonder if maybe you could give us a little color on how that's going and whether you think you've got the right distribution network and construct to do that with?

Jerry M. Kennelly

And those are good questions, Rod. So we're partners with Juniper on a number of levels, nothing exclusive, but we're the customer for their products and they're the customer for our products just on a base level. They still have title to an economic ownership of the ADC software they bought from us and we still have a contract requiring us to support them. So there's nothing actually that's changed on a contractual basis, so we continue to have that go forward. We both compete against a large, well known company. And so, we're sort of friends on that front. So I don't see a fundamental change to the strength of our relationship. Some of the details may vary from time to time. And -- on the SteelFusion, yes, it's taken some time. We've had some -- had to work through the best way to distribute it. The real issue with SteelFusion, because it is a fantastic product, is that the whole market for branch converged infrastructure, we think, is quite large, will be large. But it's a new -- it's still a missionary sell, and the person you sell to is generally a different person as a customer than our traditional contact. Most of our contacts at the big customers are the networking people, and SteelFusion sells more to the storage side of the business and more to the infrastructure side of the business. And so, we do have to cross that Rubicon both in our channel approach, the way we sell and the way we address those customers. And that's really the only thing that's keeping it, I think, from exploding immediately. And if you go back to -- when you bring out a new product at a new market that no one's done before, which was Steelhead in the early days, there's some time to get it to take off. We think we've worked through that and we do have these storage overlay sales force, we have chosen storage distribution partners, we've trained the core sales force in how to get that introduction across the aisle from their network contact to the storage buyer at the big customers, and we think it's just a matter of time before we hit that inflection point where it takes off. And I'm hoping that that's this year. I think it's just an incredible product.

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

And Jerry, can I just get you on the -- just on the Juniper comments, would you -- do you think there is a chance to expand that relationship in the future? I mean -- or do you think just par for the course it just continues, and maybe there'll be other opportunities emerging out of this. Just trying to understand kind of where you see that going over time.

Jerry M. Kennelly

Yes. I'd say we're friendly. We're not like in bed with each other or anything. But -- so there's nothing to announce right now, but it's a friendly, good relationship and things could develop, but there's nothing to talk about today.

Operator

Your next question comes from Brian Modoff with Deutsche Bank.

Brian T. Modoff - Deutsche Bank AG, Research Division

A couple of questions on Granite. You certainly brought home some of your expectations for the year. Can you give us a little more granularity on what those expectations are for the year? And then on the 5% to 6% growth in WAN Op and sort of 2 to 3x that, what's your market share on WAN Op and where do you think it's going to be in the next couple of years?

Ernest E. Maddock

Brian, the market share for WAN Op has varied around the 50% level, sometimes a little more, sometimes a little less, and that's actually been relatively steady for a good while. What we have talked about that with respect to Granite as a standalone product is we are actually looking at very high sort of double-digit growth rates this year if we execute to our plan. And as we've said earlier, we are continuing to execute to that plan. So we do expect that the year will continue to build as we gain momentum from the product announcements that we have just made and are pretty comfortable right now with where we see things going over the course of the year. So I -- you're breaking up on us pretty badly, so I don't know if that addressed both of your questions. But if you have others, let us know.

Operator

Your next question comes from Eric Martinuzzi with Lake Street Capital.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Just a clarification first, and then a question. The minus 9%, I think that was the SteelCentral comp for Q1.

Ernest E. Maddock

Yes.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

When you said you expect to grow in the out quarters, was that each quarter or was that the remaining 9 months of the year?

Ernest E. Maddock

Yes. We expect each quarter to show year-on-year growth from this point forward. And then we also expect as a year, 2014 will show growth over 2013. So recall that Q1 of 2013 had that extraordinary quarter for the former OPNET, as they closed out their fiscal year and their comp plan. They recorded a quarter that was 25% above anything they had previously done before. So it was a onetime extraordinary compare, but we think things are going to trend more normally going forward.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

I certainly appreciate that this as much as I appreciate the easy comp in Q2. The second question was on the staffing. You've been the subject of an activist effort now going on about 6 months. Just curious to know if you're seeing anything as far as impacts on recruiting or retention in the workforce?

Jerry M. Kennelly

This is Jerry. When it first came up, of course, it's concerning to employees because of uncertainty. At this point, we publicly indicated that we're not doing anything silly around here, and I think the employee base appreciates that. They've been able to see that publicly stated multiple times now in during those 6 months. So it's pretty calm around here. Actually, we've been getting great quality people, which is really encouraging to me. And we're a bigger company now and we have access to a larger pool of employees than we have when we're a smaller company and access to employees who have experience in the largest businesses in the world. And so it's pretty calm around here, and I think employees are pretty settled down.

Operator

Your next question comes from Amitabh Passi with UBS.

Eva Leung

This is Eva Leung on behalf of Amitabh Passi. I just want to know what's your buyback expectation? And can you also give us a guidance on what are you expecting your OpEx as a percentage of sales kind of going forward?

Ernest E. Maddock

We only guide OpEx in aggregate, and we've guided $152 million to $155 million for the quarter. And relative to the buyback, it is variable based on share price. And so, it's not really possible to give you specific guidance in that regard. But we did provide our guidance on a share count of 166 million shares. So that's about the framework we can provide you at this time.

Eva Leung

Okay. How about -- are you guys planning to add any more headcount and in what areas that might be?

Ernest E. Maddock

Well, we're a business that is growing and we're adding headcount everyday, and everyday people choose to leave. So we're always recruiting great R&D people, great salespeople and, really, great people in every discipline. But yes, we are planning to add headcount, although we do manage that quite carefully.

Operator

Your next question comes from Matt Robison with Wunderlich.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

So I wanted to ask you sort of to start, how meaningful would you characterize the Akamai relationship at this point? I don't know if it really registers how much for revenue, but how important is it to the decisions that your customers make?

Jerry M. Kennelly

The ability to have a service that accesses SaaS sites is important. It's a bit of a halo business. The big revenue is actually achieved by the pull-through, where the customer buys Steelheads for each of its branch offices that are connecting to the SaaS service. The main one we offer right now is Akamai. There are others -- just as Akamai is not exclusive with us, we're not exclusive with them. But they are the main person right now. And they do a good job at it, so it's important. There will be other service providers doing a similar service as time goes on. There's a number of them working on it right now. It's not kind of a market -- a limited market where it's all about taking market share from each other, it's sort of an open greenfield for everyone. There's plenty of money to be made by everyone in this market.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

What products, if any, were the standouts for the 10% of core WAN Op growth?

Jerry M. Kennelly

On the Steelhead?

Ernest E. Maddock

Yes. It was fairly broad-based. First of all, remember that, that WAN Op data includes the Granite product and that was a good contributor. Core Steelhead did well, virtual versions of Steelhead, Cloud Steelhead, did well. But it was just a fairly evenly distributed strength across the breadth of that product line. So there was no standout product within that product family.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

And Ernie, did you say you're going grow 2% to 3% more than the SteelCentral market or 2 to 3x the market? I heard both, I thought.

Ernest E. Maddock

2 to 3x.

Operator

We have time for one more question. Your last question comes from Woo Jin Ho with Nomura.

Woo Jin Ho

I'm calling in for Stuart Jeffrey. Real quickly, in terms of your RPM business, on a sequential basis it's greater than seasonal relative to your other businesses. Were there any particular drivers to the 11% down on a sequential basis?

Ernest E. Maddock

Well, don't forget what we had mentioned earlier about Q1 of 2013, which was an extraordinarily strong quarter as it was the last quarter for the former OPNET company's products. At the time, we had estimated the there was potentially as much as $10 million incremental revenue in Q1 of 2013 over their prior quarter. So that would be the primary reason for the compare there that looks a little different than the company's other products.

Woo Jin Ho

Ernie, I wasn't talking -- asking about the year-over-year comparison, but I was asking about the quarter-over-quarter comparison. It was greater seasonal versus your WAN Op business and your...

Jerry M. Kennelly

We were 7%. In total, it was 10%.

Ernest E. Maddock

Yes. So within -- frankly within the noise level.

Woo Jin Ho

Got it. And in terms of the government drivers, several years back, some of the drivers used to be data center consolidation. Have some of the drivers changed over the past several quarters to give you a little bit more confidence over the second half?

Jerry M. Kennelly

No. The government had the same interest really as the commercial customers, which is performance, response time, particularly DOD. Data center consolidation is still a big push at -- in the government. The government is going big into Amazon and other cloud data centers, so that's an important push. They want to save money on bandwidth, and so it continues.

Renee Lyall

Thank you, everyone, for joining us on the call today. Riverbed will be participating in the RBC, Baird and JPMorgan conferences in May and the Bank of America Merrill Lynch and William Blair conferences in June. And we want to ask you now to save the date for our next analyst meeting, which is scheduled for November 4 here in the Bay Area. If you have any questions about the results reported today or Riverbed in general, please direct them to me in Investor Relations. Have a good evening.

Operator

This concludes today's conference call. You may now disconnect.

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