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Riverbed Technology (NASDAQ:RVBD)

Q4 2011 Earnings Call

January 26, 2012 4:30 pm ET

Executives

Randy Gottfried - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Business Services

Eric S. Wolford - Executive Vice President of Marketing & Business Development

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

Renee Lyall -

Analysts

Daniel H. Ives - FBR Capital Markets & Co., Research Division

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

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Troy D. Jensen - Piper Jaffray Companies, Research Division

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

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

Mark Sue - RBC Capital Markets, LLC, Research Division

Ryan Hutchinson - Lazard Capital Markets LLC, Research Division

Operator

Good afternoon. My name is Kristen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Riverbed Technology's Fourth Quarter and Full Year 2011 Financial Results Conference Call. [Operator Instructions] And at this time, I'd like to turn the call over to our host, Ms. Renee Lyall, Director of Investor Relations. Please go ahead.

Renee Lyall

Thank you, and welcome to our conference call for the fourth quarter and full year 2011. The speakers on today's call are Jerry Kennelly, President and CEO; Randy Gottfried, Chief Financial Officer; and Eric Wolford, EVP and GM of our Products group.

A press release detailing our fourth quarter and full year results was distributed today at 1:05 p.m. over Business Wire. The press release is 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 our products, markets, performance, strategies and financial outlook. 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. Riverbed disclaims any obligation to update any forward-looking statement. Unless otherwise stated, financial information reviewed on today's conference call is presented on a non-GAAP basis. Historical non-GAAP items are described and reconciled to GAAP results in today's press release and in a supplemental reconciliation available on the Investor Relations portion of our website. Any future products, feature or related specifications that maybe referenced during today's call are for informational purposes only and are not commitments to deliver any technology or enhancement. Riverbed reserves the right to modify or cancel future product plans at any time.

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

Jerry M. Kennelly

Thank you, Renee. 2011 was a year of tremendous achievement and record profits for Riverbed. Annual revenues grew 32% to a record $728 million and operating profit grew 52%. We reached an operating margin of 29.4%, up more than 300 basis points compared to 25.6% in 2010. We also obtained significant milestones in the fourth quarter, surpassing $200 million in revenue and $1 billion in assets.

Total product revenue increased 6% sequentially with enterprise, nongovernment product revenue growing 21% over the third quarter. In 2011, we expanded our addressable market through internal organic innovation, strategic acquisitions and new partnerships. We delivered major upgrades to our Steelhead product line, including improved integrated support for satellite networks and end-to-end video. We added UDP optimization, which is important for several high-volume replication applications and we now support TCP and UDP protocols over IPv6. We extended support for virtual desktop infrastructure or VDI and offer the broadest and most comprehensive support for Citrix, VMware and Microsoft VDI solutions. We also enhanced Quality of Service or QoS to include deep packet inspection and we integrated Cascade Shark into the Steelhead appliance to deliver on-demand packet capture.

QoS has become more important to enterprise companies today because they have both business and recreational traffic sharing the same link. Our QoS solution protects the business traffic, ensuring it performs reliably. In fact, the QoS of the Steelhead is now so powerful. We have had customers replaced their dedicated QoS product with Steelhead.

Our technology leadership position in our core market has never been better. We received our sixth consecutive InfoWorld Technology of the Year Award for Best WAN Accelerator. Our Advanced Platform WAN optimization market share exceeds 50% and our quarterly revenue is now more than double that of our closest competitor in this space. Gartner also just released their new Magic Quadrant for WAN optimization controllers, and Riverbed is once again in the leader's quadrant. In 2012, we will continue to deliver new enhancements and new products to our core Steelhead platform, making a great product line even better.

You've heard us talk about Granite, a market expanding -- adjacent product to Steelhead that will deliver first of its kind block-level acceleration. Granite is a revolutionary product doing for edge servers and storage, what VDI is doing for the desktop. Granite will allow global enterprises to achieve complete consolidation of edge applications, servers and storage to the data center, while projecting the applications and data to edge locations and desktops thousands of miles away where they perform as if they were local without any compromise in performance.

In addition to Granite, we will deliver new Steelhead platforms this quarter. This series of new appliances includes more hardware horsepower, more software capabilities and more choices in order to meet the diverse needs and deliver more value to customers. This will be our first major Steelhead hardware platform refresh since 2008. While we believe it will generate strong revenue growth in 2012, we expect to experience some disruption to sales in the near term. We'll talk more about the new platform of Granite when they are launched.

A joint solution with Akamai to accelerate SaaS applications such as salesforce.com or Office 365 will also be generally available later this quarter. It is my strong belief that this solution is a game changing event for Riverbed because we will be the only vendor in our market able to universally accelerate SaaS applications. While SaaS acceleration and Granite are solutions exclusive to Riverbed, that substantially expand our addressable market. Combined with the new platform and ongoing updates to our Steelhead product line, they add further distance between us and any competition, making the only real choice Riverbed.

Beyond our core product line, we have entered new markets. In 2011, we completed the integration of CACE in the Cascade, making it the only solution in the market to combine flow and packet data into a single logical record, reducing the time it takes to identify and solve complex performance issues.

In the fourth quarter, Cascade product revenue increased more than 75% over Q4 of last year and for the year contributed $50 million to total revenue. A leading competitor in this space reported year-over-year product revenue growth of only 7% last week, leading us to believe we are rapidly taking market share.

With RiOS 7.0 and non-SaaS month, we took the Cascade solution one step further, integrating Cascade Shark into the Steelhead appliance operating system. This means that every Steelhead customer who upgrades to the current version of RiOS has on-demand packet capture at the edge. With the purchase of Cascade Pilot or Profiler, Steelhead customers can analyze this data, to pinpoint and resolve problems quickly.

Riverbed is the only vendor to provide this level of integration between WAN optimization and a network performance management solution. This is a significant advantage for us in competitive situations for Steelhead and Cascade.

In 2012, Cascade will continue to get better with more software upgrades and new products coming into the lineup. We think we are just getting started in this market.

Our newest product line is Stingray, which includes virtual ADC, Web Content Optimization and web application firewalls based on technologies acquired from Zeus Technology and Aptimize. Our first full quarter of Stingray sales was strong and on target. We're successfully leveraging Riverbed's brand name and loyal customer base and we have an increasing number of customers who are purchasing the products.

We also achieved a significant milestone in Q4 when Microsoft certified our Stingray Traffic Manager for Exchange 2010. We are off to a solid start, and looking forward we see tremendous opportunity in the ADC market.

Whitewater also experienced impressive quarter-on-quarter growth, while the revenue contributions remains very modest. We continue to believe this is a great product with tremendous long-term opportunity as the enterprise

starts to embrace cloud storage.

We feel very good about our position in each of our respective markets. Still, we believe we will deliver even more value to our customers through a comprehensive performance platform. Individually, our products will continue to help customers solve specific issues. We are also taking these separate offerings, integrating them and linking them to make them more powerful than they are in standalone technologies. Integrating Shark in the RiOS and the Steelhead appliance is the first example. Another example is integration of Cloud Steelhead with Stingray so that an end user will get the best possible combined benefits of Steelhead and Stingray in the cloud. Ultimately, we will provide robust unified management and configuration tools across the products, allowing customers to build, program and manage the environment that works best for them. As you can see, we have made a large investment in being a multiproduct company. There are some short-term costs to this investment as we focus on product integration and ramping our field and partners to sell these products. That said, it is our belief the long-term benefit far outweighs the short-term disruption. In the long run, our ability to deliver this performance platform will increase our strategic value with the customer.

As I mentioned, regarding the current quarter, which is typically a softer seasonal quarter for Riverbed, we expect to see a Q1 dip in our Steelhead growth as we introduce the new platform, but the new Steelhead in addition to other new products coming to market will drive accelerated growth in the balance of 2012. We have never felt better about our long-term position with the opportunity ahead of us.

At this point, I'll turn the call over to Randy.

Randy Gottfried

Thanks, Jerry. In my comments, I'll review our 2011 results. I'll also provide our outlook going into 2012. As a reminder, unless stated otherwise, the numbers I'll discuss are all non-GAAP. We're obviously very pleased with our results for both the fourth quarter and the full year. As expected, fourth quarter revenue growth was led by enterprise sales up 21% over Q3. Total Q4 revenue was $204 million, up 7% sequentially and up 23% year-over-year.

For the full year, revenue grew 32%. Fourth quarter product revenue was $140 million or 69% of total sales. Product revenue grew 6% sequentially and 19% over the year-ago period. In the fourth quarter, 90% of our product revenue came from our Steelhead family.

Cascade contributed 8% to product revenue in the fourth quarter, posting 75% year-over-year growth. Stingray represented 2% of product revenue. Total Stingray revenue, including services and support, was $5 million in Q4. Total service and support revenue was $64 million in the fourth quarter, representing 31% of total sales. Service and support revenue grew 9% over the prior period and 35% over the prior year.

Turning to distribution, 96% of our Q4 revenue came from indirect channels and 4% was sold direct. We have one partner who contributed more than 10% to revenue in the quarter and the year. One of our North American distributors, Arrow Electronics, contributed 16% to Q4 revenue and 15% to 2011.

We saw growth sequentially and year-over-year across the major regions. The U.S. represented 54% of total revenue in the quarter, EMEA contributed 29% and rest of the world with 17% of revenue. We're obviously very pleased by our U.S. and EMEA performance. We are, however, somewhat disappointed by our rest of the world results. We're focused on improving performance in this region in 2012.

Our business remains diversified across all major industry verticals. Government sales, which were especially strong in Q3, were seasonally lower in the December quarter as expected, but still a solid 17% of product revenue. Manufacturing, financial services and technology all contributed more than 10% to product revenue in Q4. These 4 verticals are consistently the largest.

Moving to costs and expenses, product gross margin was 80.8% in Q4 compared to 82% in Q3 and 80.5% one year ago. During the fourth quarter, we paid a premium for hard disk drives to protect revenue shipments following the Thai floods. This price increase, along with one-time charges related to a product transition, put some temporary pressure on the product gross margin line. Service and support gross margin came in at 72.5% compared to 72% in the third quarter and 73.4% one year ago. As we mentioned last quarter, we're incurring some extra costs as part of our restructuring of spare parts depots and vendor relationships worldwide. This transition is almost complete. Despite the impact of increased drive pricing and other one-time costs, our Q4 gross margin was 78.2%, within our targeted range. For the full year, gross margin was 78.6%, up almost one point compared to 77.8% in 2010.

Total operating expenses increased 8% sequentially to $101 million, and we're in line with our guidance. As a reminder, Q4 is our first full quarter of costs related to our Zeus and Aptimize acquisitions.

Sales and marketing also tend to spike in Q4 as a result of commission accelerators. We added 56 employees in the fourth quarter and exited the year with a total headcount of 1,610 compared to 1,244 last year.

Operating margin for the quarter was 28.8% compared to 30.1% in Q3 and 27.7% one year ago. For the full year, our operating margin improved nearly 4 percentage points to 29.4%. Net income was a record $41 million or $0.25 per diluted share in Q4. Net income increased 3% sequentially and 30% year-over-year. For the full year, net income grew 62% to $150 million or $0.90 per diluted share.

Moving to the balance sheet and cash flows, we ended the December quarter with total assets exceeding $1 billion. Cash and investments increased to $593 million, an increase of $34 million over the balance of September 30 and an increase of $92 million over last year. We continue to have no debt.

During the fourth quarter, Riverbed repurchased 626,000 shares or $15 million. Approximately $115 million remains authorized under the current stock repurchase plan. Cash flow from operations was $62 million in the fourth quarter and $209 million for the year. Day sales outstanding were 35 days in Q4 compared to 33 in Q3. Inventory totaled $11 million at December 31 compared to $15 million at September 30. As you know, hard disks drive supply is constrained as a result of the Thai floods and most of our Steelhead appliances contain hard drives. At this time, we have adequate drives to meet our demand for at least the first quarter and do expect supplies to improve as we go through 2012.

Total deferred revenue was $157 million, a sequential increase to 7% and a year-on-year increase of 36%. As a reminder, our deferred revenue was largely prepaid support contracts.

Turning to guidance, here are some general thoughts as we go into 2012. We're entering the year with the biggest pipeline we've ever had and we're on the cusp of multiple new product launches, including a major new Steelhead platform. Historically, when we've introduced new hardware, we've seen some disruption to product sales, followed by accelerated growth. We're anticipating the same trend with the platform being launched this quarter. We're also expecting a more seasonal pattern to our sales in 2012.

With these factors in mind, we're forecasting a larger sequential decline in Q1 revenue than we've experienced in the years past, followed by revenue acceleration for the balance of the year. For the first quarter, we're targeting revenue in the range of $183 million to $187 million. We're forecasting gross margin to be approximately 77% despite an approximate 100 basis point negative impact related to increased drive pricing. We expect our gross margin will improve throughout the year. We anticipate operating expenses of $99 million to $101 million. We're targeting operating margins of about 24% to 25%. We expect a tax rate of approximately 26% in Q1 and for the full year. Our Q1 EPS target is $0.19 to $0.20 per share, assuming a fully diluted share count of 168 million shares.

Looking at the full year, for the balance of 2012, quarters 2, 3 and 4, we're forecasting 18% to 22% revenue growth compared to the same period in 2011. This translates to revenue growth of 17% to 20% for the full year. We plan to exit Q4 with at least a 30% operating margin.

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

Jerry M. Kennelly

Thanks, Randy. Before we open the call for Q&A, I want to recap what we've just said. We've just exceeded our 2011 guidance, reporting Q4 revenue of $204 million and full year growth of 32%.

Our initial guidance for Q1 2012 revenue suggests an 8% to 10% sequential revenue decline compared to our average guidance of a 5% to 6% decline in this seasonally softer first quarter. As we work through the temporary disruption related to product transition, we look forward to accelerated growth in the balance of the year as we benefit from the major new product introductions.

I would like to take this opportunity to thank Riverbed's customers and to thank the Riverbed team, employees and partners for their efforts this past year, and I look forward to their continued support in 2012 and beyond.

With that, Kristen, we will open the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from Nikos Theodosopoulos with UBS.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Can you -- I appreciate the guidance on the revenue, can you maybe perhaps give a little more color on either the pipeline or more importantly your historical perspective on these product launches? What gives you the confidence of that big acceleration in the second quarter and third quarter?

Randy Gottfried

Sure. It's Randy, Nikos. In general, we're very pleased by what we see in the pipeline. It's never been bigger. We see that across all of our product lines. We mentioned the product transition that we're expecting in Q1. We have gone through this before and do have some experience and the last time we did this in 2008, we did see some disruption in sales cycles, so we're conscious of that as we give guidance for the first quarter.

Operator

Your next question is from Troy Jensen with Piper Jaffray.

Troy D. Jensen - Piper Jaffray Companies, Research Division

Just a follow-up question on Granite. So is it true that the product's going to start off as an appliance? So you have kind of 2 products kind of selling -- 2 appliances you're selling into the channel and then ultimately, is it going to move to a software type of application that you used to add on to existing Steelheads?

Eric S. Wolford

Yes, Troy. This is Eric. It's a little bit of yes and yes. In the data center, it will be available as an appliance and as a virtual appliance. And at the remote site, it will be a software.

Troy D. Jensen - Piper Jaffray Companies, Research Division

And is the old system, the old Steelhead is upgradable with the block -- with the Granite capability?

Eric S. Wolford

Yes. What was very important about this particular product transition was that in order to support the new capability, there had to be new hardware in order to support Granite. So the new platforms are the ones that are associated with Granite.

Operator

Our next question is from Jayson Noland with Robert Baird.

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

Jerry, can you talk more about the new Steelhead products? What have you heard from the field and beta sites and when would the products GA?

Jerry M. Kennelly

So we just -- so Steelhead has 2 aspects, software and hardware. We just released our most current software version, 7.0, in November, and that's been very well received. It has a number of new features, particularly UDP and the IPv6. It's selling very well. The transition we're talking about now is a -- as a hardware transition on our largest volume part of the product line and it's been announced to the partners there where it will be going out to the customer base very shortly. There's just people who have to take a moment and figure it out. Certain customers have to qualify hardware platforms, platform by platform under their provisions and they decide how they want to go forward with that. But we expect that to be smooth and to take off in the latter part of the year.

Operator

Our next question is from Rod Hall with JPMorgan.

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

Just 2 things, one clarification and then the question. The clarification is on the hard disk drive impact on margins. I know as part of gross margin were down, I think you flagged [ph] it. It was impacted by hard disk drive pricing. Could you just -- can you give us any kind of quantification on that, and I mean it seems like these problems in Thailand are fixing themselves pretty quickly, so how long do you expect that to persist in the margins? That's the clarification. And the question is, you've got all these new products coming out and historically you've talked about an addressable market, I don't know, $3 billion, $4 billion, something like that. But what do you think that addressable market is today? I mean, these are obviously pretty good-sized product opportunities. Can you give us any idea what that addressable market is in total today for your business?

Randy Gottfried

Sure. It's Randy. I'll start out with the first part on the drive pricing and Eric can take the latter part of your question. And just to clarify, so for Q4, probably about 70 basis points approximately of the margin decline was from higher disk drive prices. We also had some additional reserves related to some product transitions. So we took some extra writeoffs in the period. Going forward, we did have to basically commit to Q1, so that impacts the gross margin for the first quarter and we expect that to progress through the year. So I think our view in looking at the supply chain is that things are getting somewhat better, though I think we, like a lot of other vendors, are living hand to mouth on product and it will take some time for supply chains to refill, for safety stocks to improve and for overall pricing to subside as well.

Eric S. Wolford

And Rod, this is Eric...

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

Randy, do you think the 30 basis points in Q4, do you think that, that -- would you expect that to be reducing in Q1 or kind of at the same level?

Randy Gottfried

It actually goes up. So implied in the guidance that we gave, again Q4, we had some stock that we had purchased or had been locked into prior to the floods and then some -- a small portion that came into the end for Q1. Basically, that's a full quarter impact of the floods and then that does improve as we go through the year.

Jerry M. Kennelly

Right, and this is Jerry. This is probably already obvious to you, but when we heard about the floods and the drives, it was important to us to protect product revenue, shipment revenue and 70 basis points is a modest price to pay to protect our revenue stream. Eric?

Eric S. Wolford

Rod, this is Eric answering part B. There are 2 new addressable markets that we can go after or potential market that is. One is, with the relationship with Akamai and the product we're announcing this quarter with them, it's the SaaS market. So up until this point, we really have not been able to get acceleration in front of software-as-a-service. And so you know the size of the software-as-a-service market. Well, our belief is that there is some percent of that, that customers are willing to pay for the acceleration of those applications. And so that is the incremental market that, that is associated with. The second thing where there is incremental market that is associated is with regard to Granite and Granite is explicitly going after the billions of dollars of remote office, server storage, replication tape, backup spend that takes place. And as that refreshes, it provides an alternate architecture to bring that back to the data center. And so like we said before, we're going to do for edge servers what VDI did for desktops, and so that's the second incremental market these new products allow us to address.

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

And Jerry, do you have any idea on the size of those, I mean, particularly Granite? I mean -- I guess SaaS we can take a guess on the percent and multiply to the addressable market, but Granite is your [indiscernible].

Eric S. Wolford

The Granite one is the billions of dollars of remote office server storage spend. So if you had to take a number somewhere in the 3, 4, 5 range is probably what analysts would say.

Operator

Your next question is from the line of Alex Henderson with Miller Tabak.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

So can you give us a little bit of a sense of what the quarter trajectory felt like as you went through it in terms of both the U.S. and European markets, in terms of activity rates, deal closure. Was there any change in the tone of the business over the course of the quarter that we should be aware of or might be indicative of some change in conditions that might be generalizable to other companies or to your future results?

Randy Gottfried

Sure. In general, we have sort of a typical range. We work within as we look at linearity, and it was pretty normal through Q4. We actually looked pretty good. The rest of world was probably a little bit more back-end loaded than the U.S. or EMEA. Both those regions are larger, more developed regions, actually looked pretty good and finished strong coming out of the year.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Any changes in deal sizes or any of those metrics?

Randy Gottfried

Not really. Very similar characteristics as prior quarters.

Operator

Your next question is from Ryan Hutchinson from Lazard.

Ryan Hutchinson - Lazard Capital Markets LLC, Research Division

So I guess my question is sort of a follow-up in a lot of ways. The guidance being down 8 to 10 versus 5 or 6 typical. I guess looking back and I haven't done this yet, but I'm sure you guys have internally, what did you see with respect to a sequential decline in front of a product refresh or new product introduction? Because I can't recall seeing a decline in front of a product transition like this before. And then, why wouldn't the new products that you've introduced, Cascade, et cetera, more than offset this, and I guess the real question is are we confident that it's just that and not more than anything else with respect to the market in general?

Randy Gottfried

I'll take that one. I'd say in general, we did see a little more seasonality coming in to Q1 and so that's built into those numbers. But Q1 for us is always a tighter quarter, as we mentioned in the call. If you look at our guidance over the past 3 years, we've given probably average of 5- to 6-point decline, as high as an 8-point decline coming Q4 to Q1. There's probably a little bit more than that this quarter. If you do the math, that takes us to say low 190s off of Q4 and then there were some incremental impact as we look at the product transition. And we do think the new products generate growth, but what we've seen in the past is you generate -- you launch new platforms, people take some length of time to evaluate how that fits in, do they hold off on the old platform that they've looked at for months now and we're about to make a purchase. And so there's some number in there for the product transition we think we got it right with the incremental amount we've included.

Jerry M. Kennelly

But the products are helping, Ryan, but they're still in the -- just on the number size, Steelhead is still 90% of the revenue. And Cascade, when we bought it in 2009, we did $11 million in 2009. 2011, we did $50 million, so we've gotten from $11 million to $50 million in Cascade in just 3 short years. And we expect it to continue to grow, but Steelhead is so big in the scheme of things that it's still 90% of the revenue.

Operator

Your next question is from Jason Ader with William Blair.

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

So I guess kind of 2 parts to my question. First is could you talk about Federal? It definitely took a dip in Q4 and I guess as you expected is part of the cautious guidance for Q1 and also because of Federal and some of the uncertainty on Federal budgets right now. The second part of the question is the Steelhead. If my math is right, the organic Steelhead business year-over-year in the fourth quarter was up 13%, I think that's correct. Anyway, it's pretty substantial deceleration from where it's been over the last, let's say 6 quarters. What do you think the issue there is and do you think we're kind of getting to a new level on this business, the core business that's closer to a mid-teens type of growth rate versus where it's been north of 20 historically, certainly north of 30 at times?

Jerry M. Kennelly

Yes, so this is Jerry. So Fed, actually if you look in our government number -- so Fed, U.S. Government, Fed, had a decent quarter in Q4 and it was actually foreign governments that spent slightly less in Q4, affecting that statistic. And Q3, 27% was abnormally high. The 17% in Q4 is somewhat normal and it was mostly Fed and the shortfalls were foreign government spending. We don't expect Fed to be unusual in Q1, the pipeline and the Fed sales guys are feeling decent. So it's not a Fed story in that, although -- your second question on Steelhead. So we grew 32% in 2011, 28% of that growth was -- the Steelhead grew 28% in 2011 and that's following 2010 where it grew 40%, so a very strong prior year, a very strong fourth quarter 2010. We have gone down this multiproduct pathway and there's -- we talked about it is in the best -- there's a cost to bringing out these 4 different product lines where frankly Steelhead is easier to sell than the others, but it's important to our future as a company to be a multiproduct company and we have put resources into bringing up the other products, getting them going, making ourselves more strategic to our customers now, having a brighter future, 5 and 10 years from now and that has some impact on the Steelhead growth rate. The Steelhead market is still a greenfield market. We think it's quite large. We don't think it's down in the teens growth rate. And then some of the numbers are affected by the fact that government is down, but enterprise Steelhead purchases were way up and so you get kind of quarter-to-quarter variation between the different markets. And then there are some -- we could have executed better rest of the world. We're very focused on the rest of world. I'm going to spend the next 3 months on airplanes and get their growth rate up, better matching the U.S. and the EMEA, and I think the Steelhead is still a very strong business.

Operator

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

Mark Sue - RBC Capital Markets, LLC, Research Division

I just wanted to dive in a little bit deeper on your comments of more seasonal patterns and why that is. I mean, is it just maturation of the business or is it share gains are getting harder? And it just sounds like there's less urgency to deploy Steelheads than in the prior quarters or even in the prior years. I'm just trying to understand why that is. Is the RI CACE changed or is the penetration increased, I'm just trying to get a sense if you can help us there?

Randy Gottfried

It's hard to say. In an overall business, Mark, as we look through the course of the year and the linearity through the year, Q1 has always been a hard quarter for us. And there's...

Mark Sue - RBC Capital Markets, LLC, Research Division

But it sounds more so this time around.

Randy Gottfried

It's probably more so this year and we saw that coming into the first quarter. That was probably incrementally a little bit harder. It was not obvious to us. When we look at our funnel, the funnel looks good. But as we lay that out over the coming quarters, it was a little bit lighter in the first quarter, which is why we gave the guidance that we did and who knows, it's quite -- we've had some tighter Q2s over the past 2, 3 years. It's possible tight Q1s have contributed to that.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay. And then maybe if I could just follow up on -- just if I'm looking -- I'm an existing Steelhead customer and I'm looking at Granite. Does that require a forklift upgrade, if you can help us out just on that?

Eric S. Wolford

Yes, sure. So this is Eric. We have 2 options for customers. One option is that an existing customer who just bought last year a bunch of Steelheads and deployed them and wants to take advantage of Granite, we do have a second box they can deploy at the edge to be a standalone Granite, edge box, that's one option. The other option is that for customers who are doing their initial deployments or doing refreshes or expanding their deployments, they can buy a box that has basically both in one box, and that is based upon the new platform. So the new hardware platform can be all-in-one box or customers can buy -- those who bought last year, last quarter, for example, we can still sell Granites to them at the core and the edge in a separate dedicated Granite box.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay. And from a historical perspective, how long does a product transition last? Can this spill over into the second quarter?

Randy Gottfried

[indiscernible]. I think, again separate from the Granite question, this is more just a Steelhead model transition. We think that just the introduction, it's probably the biggest impact. It may take time, I think, then you start getting the benefit of the new platform generating revenue where it hopefully offsets any kind of disruption to the sales cycle.

Operator

Your next question is from Ittai Kidron with Oppenheimer.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Randy, I wanted to go into your second to fourth quarter guidance of 18% to 22% on a year-over-year basis, correct me if I'm wrong, and exiting the year, was it at 30% operating margin, was that the comment?

Randy Gottfried

Yes.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

Okay. Just plotting that, roughly, it looks like you're talking about $20 million steps, starting with the June quarter on average, plus/minus, from June, September and December, and I guess it sort of -- it feels like a fairly aggressive from one quarter to another. I mean, you'll be having 10% sequential growth for 3 quarters in a row, if not slightly more than that even to meet those numbers. And again, I'm just -- maybe you can refresh our minds what happened in 2008 when you upgraded and what was the sequential progression there? And again, sort of trying to get the level of confidence here in getting to those numbers. And the second element, clearly you've got a lot on your plate. I guess my fear and concern is that you're spreading yourself a little bit too thin and trying to do too many things at the same time. Can you tell us at least, for the next 2 months, 3 months, where do you think your key priority is with everything that you're doing here, whether it be Stingray or Granite or the Steelhead upgrade or Whitewater, all of those things from a prioritization, from a resource prioritization, where is the focus right now?

Randy Gottfried

Well, I'll take most that first part on just the math. I think in general, as you look at 2008, there was a lot of things going on in 2008. But we did see some real good benefits from moving to the new platform. And when we look at 2012, we have the benefit of not just the platforms, we have more products. I mean, we have basically 3 more product lines that are all doing pretty well in addition to Steelhead. So that's how we get the map that we got for 2012. On sort of our overall prioritization and so on, maybe Jerry wants to talk about that a little bit.

Jerry M. Kennelly

Yes. So it is important to us to be multiproduct and we've made the investments. We have our 4 big pillar areas. We don't intend to add a fifth. Next time we do any more acquisitions, they'll be just basically minor product tuck-ins. But the big investment is behind us now on Cascade. 2011 was year we kind of broke the code, the third year. It was a very different product to sell for our sales force than Steelhead and it took some time. We actually had to do a tuck-in with our CACE acquisition to make that product more attractive. But it's working now. And again, $50 million this year versus $11 million of revenue 2 years ago, that's a victory. And we've just bought this virtual ADC, which looks very good. We have to put some wood behind that area. I mean, one of the problems I made on -- mistakes I made on Cascade was I was a little too tight at the beginning and didn't throw the sales resources behind it and didn't really push the fast adoption. I'm not making that mistake again with the virtual ADC. And so we are resourcing it heavily. There's some opportunity costs as you're doing that, but actually we've learned a lot. The ADC sale is much closer to the Steelhead sale and it's a much more familiar product to our sales force. They'll pick it up and sell it faster than the Cascade thing. We're trying to be a more strategic partner selling at the CIO level, particularly as we accelerate applications particularly with the SaaS product that's coming out. We don't just want to be WAN optimization, we want to be the IT infrastructure for the 21st century knowledge worker. There's a lot of big companies who view us as the key partner to making the whole future of IT the way its work -- network, access to applications by their employees. We hold the keys to a lot of that. We have this incredible position, but you have to get there. You got to work through it. It just doesn't fall on your lap and we're making that happen. And I think the investments we're making will bear fruit more quickly than they have in the past. And as we say, we feel very good about the second half of the year. The product introductions we have, the partnerships we're talking about, there's these things we've announced, things we haven't announced that I think will bear very well for us. So I mean, I hate giving this guidance for Q1 because I feel so great about the rest of the year and the future of Riverbed, but we have to do the right thing.

Ittai Kidron - Oppenheimer & Co. Inc., Research Division

I guess the question is, do you think you're potentially overwhelming your sales people because in one quarter you're going to have so much new stuff coming in? What is it that you're doing with the sales force to make sure that they don't drop the ball or don't get distracted or frankly your customers get distracted with everything?

Jerry M. Kennelly

Yes, that's an excellent question. So part of our investment is that we have overlay sales forces of product specialists for each of these 4 lines of business as well as an overlay force for the channel business that works with the regional people and the channel partners. As you know we're a channel company. Virtually, all our sales are done through channel partners. We've invested a lot in training. We just had our 4-day sales kickoff for 2012 here in San Francisco with 1,000 people, all our field salespeople and all our channel partners attending a single event. And we've gone through all this in great detail with a lot of training. People like division. As we go through a more and more to a major account model in our selling, it's important -- selling a major account to have a full portfolio of performance platform products to provide to customers. So it's not simple, but 4 products is not 50. We're probably more simple than a lot of big tech companies. We're good at what we do. We stick to our knitting. We invest in training, we invest in the channel, we invest in the overlays who know the products, and we think we'll be successful.

Operator

And we do have time for one final question. And your last question will be from Daniel Ives with FBR.

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Could you just talk about performance in Europe just more anecdotal? I mean, it's 2 good quarters there after what we saw in June. Do you think you've seen a stabilization there with new leadership?

Jerry M. Kennelly

I think we have actually -- they were very strong in the fourth quarter on top of a good third quarter, so I've been delighted, frankly. And we have a good guy there who's full of energy. And as I said earlier, he didn't inherit a complete mess. He just inherited something that needs to be optimized and directed a little better and that all seems to be coming together. The team is coalescing. They were all here for their sales kickoff 2 weeks ago and I have a good vibe from the whole group. And they did well in Q4 and they have a nice pipeline for Q1. So I'm cautiously optimistic that Europe is cruising.

Renee Lyall

Thank you, everyone, for joining us on the call today. During the first quarter, Riverbed plans to participate in the Stifel, Nicolaus and Goldman Sachs conferences in February and the Wedbush Securities conference in March. All presentations will be available live for audio webcast on our website. If you have any questions after today's call, please direct them to me at (415) 247-6353. Thank you.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

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