Executives
Randy Gottfried - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Business Services
Renee Lyall - Director of IR
Eric S. Wolford - Executive Vice President of Marketing & Business Development
Jerry M. Kennelly - Co Founder, Executive Chairman, Chief Executive Officer and President
Analysts
Scott Zeller - Needham & Company, LLC, Research Division
Daniel H. Ives - FBR Capital Markets & Co., Research Division
Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division
Andrew J. Nowinski - Piper Jaffray Companies, Research Division
Jason Ader - William Blair & Company L.L.C., Research Division
Rajesh Ghai - ThinkEquity LLC, Research Division
Kent Schofield - Goldman Sachs Group Inc., Research Division
Alex B. Henderson - Miller Tabak + Co., LLC, Research Division
Ittai Kidron - Oppenheimer & Co. Inc., Research Division
Brian T. Modoff - Deutsche Bank AG, Research Division
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Rod B. Hall - JP Morgan Chase & Co, Research Division
Tal Liani - BofA Merrill Lynch, Research Division
Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division
Alex Kurtz - Sterne Agee & Leach Inc., Research Division
Unknown Analyst -
Mark Sue - RBC Capital Markets, LLC, Research Division
Ryan Hutchinson - Lazard Capital Markets LLC, Research Division
Riverbed Technology (RVBD) Q3 2011 Earnings Call October 19, 2011 4:30 PM ET
Operator
Good afternoon. My name is Deshawna [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the Riverbed Third Quarter Fiscal Year 2011 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Renee Lyall, Director of Investor Relations. Ma'am, you may begin.
Renee Lyall
Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Riverbed's third quarter 2011 financial results. I'm Renee Lyall, Riverbed's Director of Investor Relations. Joining me on the call today are Jerry Kennelly, our President and CEO; Randy Gottfried, our Chief Financial Officer; and Eric Wolford, Executive Vice President of Marketing and Business Development.
A press release detailing our third quarter results was distributed today at 1:05 p.m. Pacific Time via Business Wire. The press release is available on our website at riverbed.com. This conference call is being webcast live via the Internet at riverbed.com/investors and will be archived on our website for the next 12 months.
The information that presenters discuss today will include forward-looking statements, including, without limitation, statements about Riverbed’s current and future products and partners, statements about our recent acquisitions, our financial outlook, expected growth and opportunities in our market, our sales pipeline, our strategies and our competitive and market position. These forward-looking statements are only predictions and involve risks and uncertainties. Actual results may vary significantly. These risks are set forth on our press releases furnished to the SEC on Form 8-K today and on our Form 10-Q for the quarter ended June 30, 2011.
These forward-looking statements reflect beliefs, estimates and predictions as of the date of this call. Riverbed disclaims any obligation to update any forward-looking statement. Unless otherwise stated, financial information we will review 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. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP but not as a substitute for or superior to GAAP results. Any future product, feature or related specification that may be referenced in 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 would now like to turn the call over to Riverbed's President and CEO, Jerry Kennelly.
Jerry M. Kennelly
Thank you, Renee. And thank you, everyone, for joining us this afternoon. Q3 was a very solid quarter for Riverbed, underscoring the compelling value proposition of our products and services. Total revenue grew 12% sequentially and 29% over the prior year, marking our 23rd consecutive quarter of year-over-year revenue growth.
The U.S. showed continued strength and we saw a rebound in EMEA sales. We are particularly pleased with the performance in the EMEA arena, with revenue increasing 26% quarter-over-quarter and 31% year-on-year. Despite continued macroeconomic concerns surrounding the region, we believe the underlying demand for our products remain strong. We are also pleased by the effectiveness of our new sales leadership. Our operating model showed considerable leverage, with operating profit up nearly 40% compared to Q3 of last year, producing a record operating margin of 30%.
Net income grew more than 50% to $40 million and we exited the quarter with $559 million in cash and investments, even after repurchasing $20 million of Riverbed stock and paying out $120 million for acquisitions of Zeus and Aptimize. Over the past 90 days, we have continued to see healthy demand for WAN optimization and our pipeline for the future remains robust. Gartner released second quarter 2011 market share results, and we are very proud of our achievement of 52% market share in the Advanced Platform category of WAN optimization. Riverbed Steelhead has become synonymous with unparalleled WAN performance.
When we think about market growth, it is our belief that Riverbed's revenue trajectory is the real measure of our market's momentum, and there is still a greenfield of available market ahead of us. It's our contention at Riverbed is the market maker in WAN optimization, and our market share position in no way limits our growth opportunity. We continue to extend the reach of our products and to deepen our relationships with partners like VMware and Akamai. Riverbed recently announced support for VMware vSphere Replication, and we will be the only vendor to offer generalized solutions for SaaS acceleration through our joint solution with Akamai. The interest in the Akamai and Riverbed offering is strong and we have numerous customers lining up to participate in beta testing.
As the technology and brand leader in IT performance, Riverbed has been an enviable position in our core market, and our adjacent markets show considerable promise as well. First, network performance management. Cascade product revenue grew 73% compared to the prior year. We remain excited about our opportunity in this market. No other vendor can combine flow data and packet data into a single logical record, reducing the time it takes to identify, diagnose and resolve complex performance issues. The advantage of this architecture is that it provides greater visibility of management at a significantly lower price point. One customer's deployment of Cascade more than paid for itself in its first use when it identified a problem in minutes that the company's IT department had been unable to solve. It sounds exceptional, but we see this type of result frequently with Cascade.
Another adjacent market is application delivery controllers, or ADC. This and Aptimize together comprise our virtual ADC offering. We are now entering our first full quarter selling into the ADC market. Many of our customers are brand name companies, have chosen our virtual ADC product over others. As an example, we had a sale into the Defense Department in Q3, which underscores the security and high performance of our virtual solution. It's still early but we are tracking to the milestones we set for ourselves. These acquisitions are generating growth and we expect them to be accretive in the first half of 2012.
And finally, Cloud Storage Acceleration of Whitewater. Last week, we announced the expansion of the Whitewater ecosystem, increasing the number of cloud storage, backup software and critical database protection solutions supported to more than 15. Our customers who use Whitewater are seeing tremendous results. For example, Psomas, an engineering consulting firm, leverages the Whitewater gateway for access to Amazon's S-3 cloud storage. Whitewater has reduced storage requirements up to 29x in some locations, and the combined solution of Whitewater with Amazon S-3 has reduced Psomas' storage costs by 30% to 50%. The cloud storage market remains in its earliest stages and we continue to expect revenue from Whitewater to ramp modestly. That said, we remain optimistic about its potential as companies recognize the significant cost savings that can be achieved by extending their data infrastructure to include cloud storage.
Each of our product categories are best-of-breed on their own, but the solutions we can offer by cross-selling and integrating our offerings into a performance platform is even more compelling. Many customers today own both Cascade and Steelhead and we will leverage our cross-selling opportunity against all of our product lines. On the R&D side, we will gain a stronger competitive position when we integrate the deep packet inspection of Cascade into Steelhead's, creating a powerful and unique product, and we see significant potential integrating visibility support for Zeus and other ADCs into Cascade.
Our ability to deliver a comprehensive performance platform will increase our strategic value with the customer. Overall, we have never felt better about our competitive positioning or the opportunity ahead of us.
At this point, I will turn the call over to Randy to go through the numbers in more detail.
Randy Gottfried
Thanks, Jerry. As a reminder, unless stated otherwise, the numbers I'll discuss today are non-GAAP. For your reference, in addition to the reconciliation included in the press release, we posted a supplemental reconciliation of non-GAAP financial measures to the directly comparable GAAP measures on the Investor Relations portion of our website.
Total revenue grew 29% year-over-year to $191 million. Product revenue was $132 million, up 13% compared to the second quarter and up 28% compared to Q3 of last year. 92% of product revenue came from our WAN optimization products, 6% from NPM and 2% from ADC. Within WAN optimization, Steelhead growth was led by our 3U or data center products. Service and support revenue was $59 million in the quarter, up 10% sequentially and up 30% year-over-year.
Turning to channels, 4% of sales were direct and 96% were indirect. We had one partner contribute more than 10% to revenue in the quarter, with Arrow at 14%. We had no 10% end-user customers in the quarter. Geographically, the U.S. represented 56% of total revenue, EMEA contributed 26%, and rest of the world was 18%. The U.S. churned in another strong quarter, benefiting from the federal fiscal year end buying cycle. EMEA rebounded nicely, as Jerry noted earlier, coming in better than expected. We successfully closed business that had carried over from the second quarter and close rates improved markedly. Sales in rest of the world were flat compared to Q2 and up 18% compared to the prior year.
Looking at revenue by vertical, the government vertical represented 27% of product revenue. As a reminder, this vertical includes federal, state, local and international revenue. Manufacturing, financial services and technology all contributed more than 10% of product revenue in Q3. These 4 are consistently our largest verticals.
Let me shift over to cost and expenses. Product gross margin was 82% in Q3 compared to 81.5% in Q2 and 79.6% one year ago. We benefited from product and channel mix. While that mix may not always be this favorable, we're pleased by the overall improvement. Service margin was 72%, down from 72.8% in Q2 and 74.5% one year ago. Service margin was pressured by extra costs incurred as part of our restructuring of spare parts, depots and vendor relationships worldwide.
Our targeted range for our service margin is 72% to 75%, and we do expect improvement in this area by early next year. Blended, our total gross margin for the quarter was 79%, up about 1 percentage point versus last year. Total operating expenses were $93 million, below our guidance of $95 million to $98 million. We spent less than forecast due to lower IP litigation costs we benefited from fluctuations in foreign exchange, and commissions were lower on a more favorable distribution of revenue.
Spending in our ADC business was also somewhat behind expectations, though we expect spending to increase in Q4 both from our full quarter results and continued investment in this area. Overall in Q3, sales and marketing was 31% of revenue, R&D was 12%, and G&A, 5%. We exited the quarter with 1,554 employees compared to 1,389 at June 30. 97 of the new employees joined from the acquired companies.
Operating margin improved in the quarter to 30%. The tax rate for the third quarter was 31%. Net income was a record $40 million or $0.24 per diluted share. Net income increased 51% over the prior year.
Moving to the balance sheet. Riverbed ended the September quarter with cash and investments of $559 million, a decrease of $52 million compared to the second quarter, and we continue to have no debt. During the third quarter, Riverbed repurchased 874,000 Riverbed shares for $20 million. We also paid out $120 million during Q3 to acquire Zeus and Aptimize.
Cash flow from operations for the quarter was $90 million. Inventory totaled $15 million at September 30, up about $400,000 sequentially. Days sales outstanding was 33 at quarter end, down from 37 days in Q2. Total deferred revenue was $148 million, up 11% sequentially and 37% year-over-year.
Turning to our fourth quarter outlook, our guidance is non-GAAP. We're estimating revenue between $198 million to $202 million, which includes $4 million to $5 million from our new ADC business unit. Gross margins are expected to be relatively flat and within our 78% to 80% targeted range. Operating expenses are expected to be between $100 million and $102 million, reflecting our seasonally higher percentage of commissions in Q4 along with increased investments in ADC and general business growth. The tax rate is forecast at 31%. All of these results in EPS between $0.24 and $0.25, assuming a weighted average share count of 168 million.
I'll now turn the call back over to Jerry.
Jerry M. Kennelly
Thank you, Randy. The summary of what we have discussed today is that our market opportunity is very large and significantly underpenetrated. Our position continues to strengthen organically and through acquisition, and we are a much more strategic vendor to our customers with an ability to deliver a comprehensive performance platform.
Over the long term, we have produced top of market growth in both revenue and profitability. I feel very good about our strategic direction, our competitive position across all our market segments and our market opportunity.
We will now open the call for Q&A. The chime of the operator will take your call.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Ryan Hutchinson.
Ryan Hutchinson - Lazard Capital Markets LLC, Research Division
I guess the question here is on the government business. Can you talk about the large deal in Q3 and if, in fact, all of that closed? And then the expectations going into the fourth quarter, and as we look into 2012, just the impact that you're seeing from the data center consolidation projects? And the flip side to that is the nongovernment business in the quarter was down, by my math, about 3%, so I just wanted to understand the dynamics around that part of the business and how we should think about that moving into the fourth quarter.
Randy Gottfried
I'll take the first one. It's Randy. I'd say, in general, we're pleased by government performance in Q3. I think it's a good testament to the fact that, with government's under pressure for spending, we fare pretty well on the prioritization, and I think that contributed to a solid quarter. We have a variety of deals, big and small, in the space. We continue to get new customers. Those pay off not just in a given quarter but over time as companies deploy throughout their networks. Overall, we're pleased by the government performance. And the second thing, let me make sure I got that right, on the flip side...
Eric S. Wolford
On consolidation projects, consolidation projects continue to grow -- Ryan, this is Eric, by the way, I should mention -- and continue to be probably our number one driver, whether it's for private clouds or server consolidation or site consolidation or virtualization. That still continues to be the sweet spot of what drives particularly our very large deals.
Jerry M. Kennelly
Yes. And nongovernment business was up 19% year-on-year excluding government. And basically flat quarter-on-quarter. It was down $1 million or $2 million quarter-on-quarter.
Operator
Your next question comes from the line of Rod Hall.
Rod B. Hall - JP Morgan Chase & Co, Research Division
I just wanted to follow up on the EMEA performance. It was obviously a nice, strong compare after last quarter. I just wonder, Jerry, if maybe you could comment on the status, the changes that you're making, are those all finished now and do you feel like that region is pretty much better down, or do you think that we could still see some volatility there through the end of the year? And I was wondering just more on the regions on the rest of world, it's not really growing that much? Why is that the case? And is there any kind of a fix for that? Do you need more salespeople, distribution, that kind of thing. I'd just be curious to hear about that.
Jerry M. Kennelly
Yes. So EMEA did very well. As we indicated last quarter, EMEA wasn't broken and it hadn't fallen off a cliff. It slowed and had some execution issues. We had great execution improvement this quarter. Our new VP of sales there did a good job rallying the troops. A couple of deals that were delayed in June did come in and did book in the quarter, as well as the regular pipeline had normal closing rates, better than the slower-than-normal closing rates we had seen in Q2. So they have a decent pipeline going into Q4, and our new guy's making some tweaks but nothing dramatic. He thinks, having been there a quarter now, that he has a good team. And with some direction and execution help, they'll be fine. So we're feeling much better about EMEA. Rest of world. Rest of world is kind of a conglomeration of things for us. It's Canada, it's Brazil, Latin America with Mexico. It's Australia and New Zealand. It's China, India, Japan and then it's the ASEAN countries. So it's a big pot of different regions with different management in it. It has done well over time. It has sort of outgrown the other areas and really had a tough comp going into Q3 versus the prior quarters in last year, number one. And then number two, there's a certain amount of lumpiness in big deals with some of these smaller countries where you get a big government deal or big corporate enterprise deal in one quarter that maybe won't repeat the next quarter. So there's nothing fundamentally wrong in rest of world and we think it'll move forward. We do -- we still do need more progress in developing the big underdeveloped markets, like China and India. And when we get those up to a bigger run rate, then you'll see less volatility in rest of world numbers over time.
Rod B. Hall - JP Morgan Chase & Co, Research Division
Jerry, just to comment on the EMEA. Is there any way to think about, to quantify how much those deals from Q2 that rolled into Q3 were? I mean, should we be averaging the 2 quarters together to kind of get a run rate or can you give us any help on kind of how to think about your trajectory there?
Jerry M. Kennelly
It wasn't that big. 1 million or 2 million is the way to think about it.
Operator
[Operator Instructions] Your next question comes from the line of Jonathan Rukhayver [ph].
Unknown Analyst -
Gartner seems to believe that penetration in the -- your penetration into the installed base is around 20%. So I'm just kind of curious. To further capture that opportunity, how do you think of the dynamics between price and in volume? Do we need to see a larger number of lower-priced products from Riverbed to drive further penetration?
Eric S. Wolford
All right. Yes, Jonathan, this is Eric. Yes, there's a couple of things. Oftentimes, the way we see deals going in larger companies is we can sell to a business unit and address the problems of a business unit, or sell to an application to address the problems of an application. The challenge for us to get full penetration or full deployment is to get customers to make the architectural change to just in every remote office, this is just one of those items. And data is centralized, and that's the new model of how enterprise IT is done. And so that is the opportunity for us. And our sales forces are doing that as we try to lever an application deal or a single business unit deal and try to turn it into a company-wide architectural sale.
Unknown Analyst -
But does that require more lower-priced product out of the company to deliver that?
Eric S. Wolford
We have a pretty broad range of products, I think $3,500 up to $0.25 million. So it's a pretty broad range. Maybe we'll introduce a smaller one, maybe we'll introduce a bigger one. But it's more tweaks, it's not a big fundamental change.
Operator
Your next question comes from the line of Jason Ader.
Jason Ader - William Blair & Company L.L.C., Research Division
When I look at the organic guidance for Q4, guys, it looks like it's way below seasonal, around 4%, and then look back in history, you guys have grown pretty much double digits sequentially in your history except for maybe one year. I'm wondering, does that have to do with the government business expected to be down in the fourth quarter just after a strong third quarter? And then related to that, I don't think, Randy -- you answered the first question, but was there a specific large deal, kind of 10-plus million, that impacted the quarter or you can confirm?
Randy Gottfried
Sure. Let me the take the pieces of that. So first of all, our approach to Q4 guidance really is the same as we've always approached it. We do have a dynamic where Q3 tends to be high in government, especially U.S. fed [federal], that seasonally trails off in the fourth quarter, and that's more than made up for with growth in the enterprise part of our business. And so that approach has been the same as we look into this Q4 as we've done in prior years. Your question on specific deals, there has been some commentary about a bigger transaction. I would say, in general we had no 10% customers for the quarter. We typically don't comment on specific customer purchases or deployments. In general, I think one thing you should be wary of is that sometimes a company can get an award, but that may shift over multiple quarters. That's not a commentary on a specific deal, but in general, sometimes these are multi-quarter situations.
Jason Ader - William Blair & Company L.L.C., Research Division
So just a quick follow-up on that, just on the fourth quarter then. So is it just -- is the macro impacting the guidance being where it is? I mean, it just seems like, again it's sub-seasonal. So I know you talked about the government being strong in Q3, but I didn't get a clear answer on why...
Randy Gottfried
Yes, sorry about interrupting. In general, everything we know is sort of baked into the guidance. Yes, we're obviously conscious and we read the papers and watch the news on government. I think in general, we feel good about government spending as far as their need and their prioritization of WAN optimization and their purchases. In the near term, clearly we're looking at a seasonal decline. You see some of the dysfunctional nature of U.S. government budget approvals as well, so we try to be prudent in our outlook. That's all baked into our guidance.
Operator
Your next question comes from the line of Mark Sue.
Mark Sue - RBC Capital Markets, LLC, Research Division
Gentlemen, maybe if I can ask how customers are seeing WAN optimization in terms of the rank order of IT spending? Do you think it's become more important over the last few years, the same or kind of less important, more on a relative basis to other segments of overall IT? And then what are you seeing in terms of WAN link prices. Are prices coming down to a point where customers are rethinking the need for WAN op?
Eric S. Wolford
All right. Sure, Mike, this is Eric. The enthusiasm and interest level for WAN optimization has definitely increased and it's increased commensurate with the projects that are driving IT. Are they prioritizing their projects, and as it turns out, virtualization, consolidation, mobility, things like that, WAN optimization -- distance becomes a big problem that has to be overcome. So WAN optimization is a very high priority. I think many of the surveys have reflected that. In terms of bandwidth prices, bandwidth prices have kind of -- there's a long-run trend that's been going with bandwidth prices and it varies based upon where you are geographically. And we have -- of course often as time goes on, we give more bandwidth per dollar and have done that for many years and probably will continue to do that, and so we kind of track and match with that. I would say, though, it's very important to point out that bandwidth is a part of the solution. Latency in solving the speed of light problem and the slowness problem, which is independent from bandwidth, is also a very important part of enabling these top-priority projects that IT is doing. So it's not just a bandwidth problem.
Operator
Your next question comes from the line of Michael Genovese.
Michael Genovese
In a quarter where government sales are just 29% of revenues, is there an opportunity cost associated to that? I mean, is more of your focus on that vertical and does that take away from the execution on the enterprise side, or do you have the capacity to kind of take all demand that comes in the door during the quarter?
Randy Gottfried
Look, first the number is 27% not 29%. I think that, maybe a certain bit of that, you end up focused on that cyclical pattern, where we're sort of all hands are on deck to making sure fed comes in, in a relatively short time frame. I can't say we're sort of totally precluded from enterprise, but there is a seasonal pattern. You have a summer time frame in a lot of parts of the world, including the U.S., that can be a softer period for purchasing.
Michael Genovese
Okay. And then this might be a repeat of what you said earlier, but could you just give us the update on the Whitewater and the Cloud Steelhead in terms of where they are in the life cycle of those products? And also what do you think the gating factor is for the development of those markets?
Eric S. Wolford
Yes, sure. This is Eric again, Michael. Cloud Steelhead and Whitewater are 2 different things, but they're both tied to the same thing, which is cloud demand. At what rate do enterprises move to cloud deployments? When do they move compute to cloud, when do they move storage to cloud? I can say that software as a service, moving the application to the cloud has been the fastest-growing cloud service. I think most analysts would look to that. We have a relationship where we're launching a project or a product coming up early next year with Akamai that is going to basically take Cloud Steelhead, sort of, and generalize it for all of software as a service. So that's one where we have betas that are lining up and we see sort of a lot of interest and demand. With regard to Whitewater, Whitewater is making progress but it's still early, and cloud storage itself, it's kind of caught behind the progression of enterprise purchasing of cloud storage. And so there's an enormous amount of enthusiasm and talking and kicking the tires and planning and exploring. It's just not yet hit the point of cloud storage for enterprise major purchasing.
Michael Genovese
Okay. And did you give a revenue number for Cloud Steelhead?
Eric S. Wolford
We did not.
Randy Gottfried
It's embedded in our WAN optimization number. We have not call out specific products.
Operator
Your next question comes from the line of Rajesh Ghai.
Rajesh Ghai - ThinkEquity LLC, Research Division
I'm curious as to what you're seeing in terms of the approach your customers are taking with the applications? Can they consolidate or eliminate some data centers? I believe they're going to move the applications to the public cloud or move it to their own internal data center or the private cloud, so the question is whether you're seeing enterprise approach over the others, and what impact do you think it will have if more application workload starts to move to the public cloud instead of the private cloud?
Eric S. Wolford
Sure. Rajesh, this is Eric. Without a doubt, the private cloud is the dominant deployment mode instead of enterprises today just in terms of how are people deploying applications. It by far has the lion's share. I think the use and movement of some applications to the public cloud is happening and it's happening at that software as a service level. For Riverbed, we love both, whether you are consolidating back to your own data center or whether you're consolidating to a third-party data center. We solve the problem of distance between a user and their data, and so whether it's your own data center or a third-party data center, as long as it's consolidated into a few spots, then the need for WAN optimization is very acute and is a great opportunity for us. Now we've had to morph our products to adapt to that, and we've done that with Cloud Steelhead and the Akamai relationship, so we feel like we're very well-positioned as customers deploy internally in their own data center or as they move to a third-party data center called a cloud data center.
Operator
Your next question comes from the line of Ittai Kidron.
Ittai Kidron - Oppenheimer & Co. Inc., Research Division
Maybe, Randy, can you talk about a little bit your working assumptions from a mix standpoint, whether it be vertical and regional going into the fourth quarter? I mean, I think it's fair to assume that government as a vertical declines, but can you tell me what is it that you expect will make up that gap going into the next quarter? And also from a regional standpoint, any thoughts on how you think the fourth quarter will play out for you?
Randy Gottfried
We typically don't go into a lot of granularity. We are looking for enterprise growth in all regions, growth in -- and total growth in all regions as well. We look at this all based on what we see in the funnel. We see in all the geographies some nice upticks in business. We are conscious of the government dynamic, though, the overall -- and we look at the overall pipeline and health coming out of Q3 into Q4, we actually feel pretty good.
Operator
Your next question comes from the line of Daniel Ives.
Daniel H. Ives - FBR Capital Markets & Co., Research Division
Can you just talk about deal sizes in terms of -- do you see anything different in terms of deal sizes getting larger, maybe year-over-year sequentially? And then can you just talk about linearity in the quarter?
Jerry M. Kennelly
We do lots of deals, lots of transactions. One of the beauties of our models, we have no concentration of customer, no concentration of channel, no concentration of vertical. It's a very diffuse, robust revenue stream. On the average deal, it doesn't change much over time. But in terms of big deals, over $0.5 million or $1 million apiece, we are -- we have been seeing for a year now, and it was true again in the third quarter, more larger deals. Still, it's not a dominant thing in the company. We don't depend on the big deal to make our number, but as we become more strategic and important to the customer, we do take down bigger deals as time goes on.
Operator
Your next question comes from the line of Alex Kurtz.
Alex Kurtz - Sterne Agee & Leach Inc., Research Division
Randy, can you talk about the Arrow relationship and sort of your distribution strategy? And those have been in discussion for a while, but how can that really help maybe offload some of the sales and marketing expenses in the long-term model? Have you seen an uptick and sort of improvement on that front?
Randy Gottfried
I think we have been pleased. Arrow and Avnet, we moved to probably about 1.5 years ago as a value-added distributor in the U.S. and, in general, we've been pleased. They're starting to add more and more value by bringing us to new end-users and VARs that we have not had relationships with before. That was a structure that we have elsewhere in the world, really, for a number of years, where we have regional distribution, local VARs, and that's sort of all supplemented by some global resellers, global service providers as well. So we're making some progress there. I think it's evidenced in our own sort of operational efficiency that you see in our numbers that we're getting some value out of our channel. I still think there's some to go. I think at the end of the day, not just operational efficiency but growth as well, as we get partners more and more proficient at selling, more and more ingrained in how they do business, that gets us to more end-users, and that helps fuel the top line and not just the bottom line.
Operator
Your next question comes from the line of Alex Henderson.
Alex B. Henderson - Miller Tabak + Co., LLC, Research Division
So I just wanted to get a little bit more detail on how you're thinking about and how you factor the quarter? Obviously, you use your lead book to test the merits of the forecast, but did you weigh a little heavier on that process in terms of factoring in more risk given the macro environment you're seeing and maybe denigrate the forecast a little bit more than normal? And second, on the same lines, can you talk about to what extent you're factoring in an assumption of a budget flush this year in the enterprise versus a typical budget flush, or is it -- are you assuming a little bit more, a little less? I would assume that a little bit more caution is probably likely. And similarly, given the end of the fiscal year on the government side, are you factoring in a steeper sequential decline in government than normal, based off of the assumption that there's going to be spending constraints there as a result of the obvious budget challenges?
Jerry M. Kennelly
Let me see if I can remember all those. So, yes, we -- actually the guidance we've given Q2 to Q4 is very similar to what we gave last year in 2010. And we do have a robust enterprise pipeline. It does take up the place of the government business. There will be some falloffs. That's normal. We expect it. We do expect government business to be in a normal range in Q4. They aren't going to close shop, but certainly it isn't going to be easy. The momentum we have, there's a Q4 effect, and you can call it budget flush. It's a combination of budget flush, there will be some, I don't know if it will be as robust as past years but we do expect some, and it's combined with an effect in our own sales force, where our sales reps worldwide are in the highest part of their commission accelerator percentages for the year. And they go after it like the devil in the fourth quarter. So it's -- we've done a normal takeup of this, we've put a certain amount of caution in it, and we feel good about our guidance.
Alex B. Henderson - Miller Tabak + Co., LLC, Research Division
So did you factor down a little bit more given the environment than normal, or did you just use exactly the same factoring that you would normally use?
Randy Gottfried
We always -- when we prepare our guidance, we always look at everything we see. So we try to recalibrate after every quarter. Obviously coming out of Q2, we had a different scenario with the close rates that were different. They did improve in Q3. But we're conscious of the market, what we see in the field all the way up to today, that's all baked into the guidance for the following quarter.
Operator
[Operator Instructions] Your next question comes from the line of Brian Modoff.
Brian T. Modoff - Deutsche Bank AG, Research Division
A question around the rest of the world business. It's been kind of running around $34 million for the last 3 quarters flat. Can you maybe just talk a little bit about that, and what you're doing to try to increase that. And that would seem like one of the bigger opportunities for you guys in that part of the market.
Jerry M. Kennelly
Yes, Brian. I think we've discussed it a little bit earlier. Again, the rest of world is an accumulation of some very discreet different markets for us with different sales management and different individual dynamics. It's grown very robustly over the last 4 years. And there's a certain amount of lumpiness as you get from Brazil to Canada to Australia and New Zealand to China, to India, to the ASEAN countries. We're focused on taking some of the big emerging markets, specifically India and China, and building those up to a bigger run rate commensurate with the size of those markets and try to take some of the volatility out of those markets. They have their own macro, so in very different parts of the world, each one has its own macro to deal with. We think we have good management teams there. We're always looking at the distribution partners to improve the distribution. We focus headcount additions in those markets. And our long-term outlook is very optimistic there.
Operator
Your next question comes from the line of Kent Schofield.
Kent Schofield - Goldman Sachs Group Inc., Research Division
I was wondering if you could talk about any changes in the quarterly revenue run rate from a new versus existing customer standpoint? And then, also, have you seen any change in the speed of rollouts of existing customers, especially on the larger deployment side?
Randy Gottfried
Sure, this is Randy, I'll take the first part. So we've stopped talking about the new customer contribution, which is typically, this quarter is no different, it ranges from about 1/5 to 1/3 of our revenue in a given quarter being new customer. We've shied away from using it internally or sharing it because it tends not to be a useful indicator. If you spend 6 months with a customer, their first purchase ends up not being too meaningful. So the exciting part is, when you do get a new customer, we've added hundreds of new customers, we now have over 16,000 customers at Riverbed, and most -- for a big company, most purchases come after that first sale. And so that continues to do well. I think the pattern matching is difficult because they vary pretty widely. We have big companies who buy one box at a time, and then you have other big companies who you can encourage to buy in some bigger chunks. As Jerry mentioned, we have seen some bigger deals, which are typically with repeat buying customers who have started to deploy and can deploy a little bit faster. So while the repeat buy patterns still vary pretty widely, we're encouraged by what we see, and most excited by a lot of the new customers that come on board that represent a ton of future revenue.
Operator
Your next question comes from the line of Jayson Noland.
Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division
A question on Cisco specifically, there -- with the product refresh recently, and there's talk in the channel of Cisco getting more aggressive in general. It sounds like Riverbed stayed disciplined, but maybe if you can talk about Cisco and what you're seeing over the last quarter?
Eric S. Wolford
Sure. This is Eric, Jason, and let me talk specifically about the past quarter. The most sort of striking thing about the competitive environment last quarter was a sort of substantial move in our unopposed rate, which is the number of new customers that we add that had no competition. We added them. We did a great job. The customer bought the products and we never really had to compete with Cisco or anyone else. That number exceeded 50% this past quarter, which was kind of -- it's a counter data point because it says the competitiveness and the veracity out in the field is actually -- I'm sure on big deals it's still there, but generally speaking it's like Cisco and Blue Coat and some of the others sort of took their foot off the gas a little bit. Now I realize Cisco just made some announcements with regard to new hardware, and so we recognize that and we don't think that's a meaningful change to the competitive dynamic. That's just Moore's Law, and I think it's been 4 years since they've updated their data center box. So now they're updating the hardware, which is completely normal. So our view is that the competitive environment actually softened and our win rate was very strong again.
Operator
Your next question comes from the line of Matt Robison.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
I was hoping to get a little bit more flavor on the plans for Whitewater. You've -- you're coming up on a year since you started talking about the product and you added a General Manager in the quarter. And so is it where -- I heard what you said about the sort of priority spend and waiting for the market to put storage more in the cloud, but where do we -- where are we in the missionary process here? And if you could help us just understand, what do you think this -- a little bit more color on the sequence of industry development events there. And also, if you could comment a little bit about how you feel about your pipeline for ROW now versus 3 months ago.
Jerry M. Kennelly
This is Jerry. So there's a bit of chicken and the egg with the Whitewater and cloud storage. We can see the market. We have the right product. It's developing. It's still early, but it's coming. And cloud storage has to kind of go from being a small SMB in start-ups to actually big enterprise shops using it. A part of Whitewater will be a catalyst for that change to actually happen. And so we have been working on the product for x years. The first versions are out, we're enhancing it, making it bigger, more powerful. Our plan now is, with just this quarter, given it its own General Manager setup as a separate business unit, and the plan for the rest of the year and for 2012 is to go from it being as a funded development product to a funded sales and marketing organization. So we're bringing in a VP of sales to work for that General Manager to put in more direct attributed sales and marketing resources to that product now. We're working very closely with the cloud storage providers who -- it's important for them that this product exists and be successful. And so we think we're in a position -- it is coming. When it gets here, we'll have been first with the best product, the best brand and the most distribution. And the only part we can't control is the take-up rate of how cloud storage hits the enterprise and becomes more than a small business product. But we see it. But at the same time we don't have want to hype the revenue ramp, although we have a fantastic product.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
So before we get to my other question, let me just -- so you put the General Manager in place and now -- I lost my train of thought. Can you just go to the ROW pipeline?
Jerry M. Kennelly
Yes. So we do all the pipeline reviews in the first part of each quarter so we can give reasonable guidance on the call, and that review took place in the last week and a half for ROW. And they have an optimistic out view and a robust pipeline, so you make their number and get their commissions and support the guidance we gave for the fourth quarter.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Was it -- I sense a little bit of -- maybe I didn't sense it right, but I sense a little bit of frustration in some of your answers to the ROW question. Is it pipeline, is it -- how does it compare to what it was 3 months ago?
Jerry M. Kennelly
It's up. Yes. So again, the rest of world has grown very robustly over the last 3 years for us. We've had 2 flattish quarters, and again they're distinct markets geographically dispersed, with a tendency to be lumpy sometimes, but there's no fundamental problem in rest of the world.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Okay. The other part of my question that I spaced on for a minute there was you've got a 6% business with NPM now. You've got some acquisitions where you've got a 2% business with ADC. Have you recognized revenue yet for Whitewater? And I know that there's -- probably because of the acquisitions you had to do break out ADC even though it's a low single-digit percentage. Should we -- do we wait till we get to like 5% of revenue before we start talking about breaking out Whitewater, and how should we think about that?
Randy Gottfried
We'll take it quarter by quarter. I think in general, we've got very impressive growth percentages right now in that category, but as a proportion, in total, it's just not there yet. I think it's -- as expected, there's no real change in our outlook for Whitewater. The feedback we're getting from customers is very good, from partners is very good. The people who are using it really like it a lot. But we're -- we've been consciously setting modest expectations just as we're heavily tied to how the market adoption goes for the success of Whitewater.
Jerry M. Kennelly
It will be one of many growth catalysts we have for 2012. So Whitewater, with the sales and marketing investments, should grow. We expect our ADC position to continue. The combined products of Cascade with the Shark product, integration has gone well and that takeup's going well. We have new versions of Riverbed coming out next year. We have the Akamai Riverbed strategic partnership happening early next year. And then we just have the continued importance of data center consolidation, private cloud and cloud computing in general, all of which are favorable trends for us. So you take all these things together and we have a very attractive product portfolio for the biggest companies of the world to do the IT computing of the future.
Operator
[Operator Instructions] Your next question comes from the line of Scott Zeller.
Scott Zeller - Needham & Company, LLC, Research Division
I hate to ask you again about Europe but I will. I remember in the early part of your comments, you were talking about Europe being above expectations. And I'm wondering if, looking forward into the December quarter here, did you change the assumptions on close rates, or did you stay with the same earlier conservative assumptions?
Randy Gottfried
Our guidance for Q4 basically is a recalibrated outcome of what we saw in Q3 and what our outlook was. In Q3, we basically saw a return to the more normal close rates in EMEA. They were abnormally sort of weakened, I think, in the second quarter. We're conscious of all the dynamics going on in EMEA, as well. But given the growth we see in the funnel, given the close rates we see as of today, literally as of today, that's all baked into the numbers that we saw. And we're overall optimistic for the territory.
Operator
Your next question comes from the line of Brent Bracelin.
Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division
Wanted to go back to the nongovernment kind of enterprise business. By my calculations, it was kind of 35% in Q2, slowed to kind of 19% in Q3. Your Q4 organic outlook implies kind of 18% to 20%. I guess, A, is this the right growth rate we should think about applying to 2012 that's sustainable, given kind of the external macro environment that's very challenging? And then, B, is there anything else outside the external that you'd attribute that kind of slowdown in the nongovernment business in Q3 from, again, 35% to 19%? Or really, would you attribute it primarily to kind of the external environment?
Jerry M. Kennelly
So we thought our Q3 enterprise was relatively normal. We had a very powerful Q2 enterprise, particularly in the U.S. As we go -- we don't talk about 2012 -- what I can say about Riverbed and our product is we have a big available market and we have a top product in that market, and it's a product that has a good ROI. And with that, we have a track record of, is when the macro is strong, we do fantastic. When the macro is just average or slightly weak, we still do good. We still do better than everyone else. So like I said, we won't give 2012 guidance out. Once the macro becomes clear, we can all have a better opinion of that. The enterprise pipeline is powerful. There is some distraction in -- to enterprises in the summer quarter for vacations. There is some direction within the company, particularly at the management level, more toward the government business in the third quarter, and we drive that very hard. So we think we have the right pipeline, the right guidance and the right enterprise thrust to make our fourth quarter number.
Operator
Your next question comes from the line of Tal Liani.
Tal Liani - BofA Merrill Lynch, Research Division
I just want to go back to the comments about the environment and also fourth quarter. Sorry, I know that I'm asking the same question but just different way. If I look at the last 3 quarters and I remove government that you disclose it basically every quarter, I'm getting in the neighborhood of 31% cumulative growth between Q1 to Q3. This year it's in the neighborhood of 0. If I remove the guidance, if I'd look at your guidance for next quarter and I remove some kind of estimates for federal, which is 18%, 19% of revenues in line with what you had last year, I'm getting an implied growth of everything else of 21%. So I just -- it's hard for me to understand. Two things. First, why isn't everything else but government growing this year? It's flat since the beginning of the year. And second, why will it change next quarter and have such a giant jump, 20% sequentially, unless government stays at 27% of revenues and stays at $50 million a quarter?
Randy Gottfried
I'd say, the more you slice the data, I'd say in general, from a top level, we think there is enough business, both commercial and government, to get our number to Q4. I think we've not given a lot of granularity to some of the slices of data that you referred to, but in general, we're pleased by the funnel that we see. That's how we give our guidance. We do it from a very detailed bottoms-up way with a little bit of top-level observation from management. But we see actually the enterprise business looking pretty good coming out of Q3 and into Q4. There's going to be some variation. And if you look at -- over the years at Riverbed, quarter-to-quarter, the narrower slices of data that you have, there is some variation. But from a top level, we continue to do well because we have a lot of value for customers in a time when they're looking to try to get more out of less. So we feel we've got good value proposition, a good market, and very specifically a good funnel going into Q4.
Tal Liani - BofA Merrill Lynch, Research Division
I understand it, but we are talking about 85% of your revenues. That's the slice I'm talking about. It's not a small slice. It's 85% up until this quarter.
Randy Gottfried
Understood, Tal. I think at the end of the day, our guidance is our guidance. It's based on what we see out there, and that's something we feel good enough to share with you on.
Jerry M. Kennelly
And government revenue is good revenue too.
Operator
Our final question comes from the line of Andrew Nowinski.
Andrew J. Nowinski - Piper Jaffray Companies, Research Division
.
Just, looks like Cascade was up 13% sequentially and Steelhead was up about 10% sequentially this quarter. I'm just wondering if you can talk about the attach rate to Steelhead deals for Cascade, and then whether you're getting to any standalone deals at new customer sites. And then perhaps if you could provide a framework around how to assess the size of the Akamai opportunity and how you think about it, and whether it's Akamai, Internet endpoints within their customer base, et cetera.
Eric S. Wolford
Yes, Andrew, this is Eric. I think well over half of our Cascade deals are -- there is some association between Cascade and Steelhead, so it's either a Steelhead customer that's purchasing Cascade or it's a new customer purchasing Cascade and Steelhead together. There is a meaningful chunk that purchases Cascade only. So a new customer purchasing only Cascade but that is not the majority of the revenue. The majority of the revenue is some association or affiliation with Steelhead, and we're obviously trying to leverage that and foster that. So that's probably part a by-product of our efforts as well. And then with regard to Akamai, if you could just say your question again with regard to Akamai?
Andrew J. Nowinski - Piper Jaffray Companies, Research Division
Just wondering if you could assess, or provide a framework on how to assess the size of that opportunity and how you think about it internally.
Eric S. Wolford
Sure, yes. So the target for that is SaaS, software as a service. So the market opportunity is there's a certain spend that's going to take place for SaaS and there are many forecasts on what the SaaS spend is for enterprises, and some percent of that to be determined by our results, but it's what customers we believe will be willing to pay to have that software as a service delivered as if it were local, make it feel like it's local, make it particularly fast. So the performance premium, or the performance price someone will pay on top of their software as a service deployment. So the base would be the SaaS market.
Renee Lyall
Thank you, everyone, for joining us today. Our next quarterly conference call to discuss our fourth quarter will be January 26, 2012. During the fourth quarter, Riverbed plans to participate in the Piper Jaffray, Wells Fargo and UBS conferences in November, and the NASDAQ and Barclays conferences in December. All presentations will be available live via audio webcast at riverbed.com/investors. If you have any questions about today's call or Riverbed in general, please contact Investor Relations. Thank you.
Operator
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.
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