Packeteer Q3 2007 Earnings Call Transcript

Packeteer, Inc. (PKTR)

Q3 2007 Earnings Call

October 18, 20075:00 pm ET

Executives

Bradley Gittings - Director of Investor Relations

David Yntema - Chief Financial Officer

Dave Côté - President and Chief Executive Officer

Analysts

Troy Jensen - Piper Jaffray

Matt Robison - Ferris, Baker Watts

Ryan Hutchinson - WR Hambrecht

Richard Sherman - MKM Partners

Bill Choi - Jefferies

Christian Schwab - Craig-Hallum Capital Group

Samuel Wilson - JMP Securities

Manuel Recarey - Kaufman Brothers

Rohit Chopra - Wedbush Morgan Securities

Erik Suppiger - Signal Hill Capital

Jesse Cohn - Elliott Associates

Cameron Cooke - Janco Partners

Paul McWilliams - Indie Research

Presentation

Operator

Good afternoon, and welcome to the Packeteer's Third Quarter Earnings Conference Call. In today's conference, your lines will be on a listen-only mode until the question-and-answer session. Today's call is also being recorded. If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Bradley Gittings, Director of Investor Relations. Sir, you may begin.

Bradley Gittings - Director of Investor Relations

Thank you. David Yntema will begin today’s call with the summary of Packeteer’s financial results for the third quarter 2007. Dave Cote, our President and CEO will follow this summary with an overview of our business.

At the conclusion of these presentations there will be an opportunity for questions. Today’s call is being recorded. A replay of this call along with management’s script can be accessed on Packeteer’s website.

During the course of this conference call, we will discuss with you some of the factors we currently anticipate may influence our results going forward. These forward-looking statements include expressed or implied statements regarding future operating results and business developments based on limited information available to us now, which is subject to change.

Actual results may differ materially from those stated or implied by the forward-looking statements we may make today. Such statements are subject to risk and uncertainties including the risks described in the press release announcing this call and the risks discussed in the risk factors section of the 10-K filed with the Securities and Exchange Commission on March 16, 2007 and our 10-Qs and other reports filed with the SEC from time to time.

During this conference call we will be using non-GAAP financial results that exclude the amortization of purchased intangible assets in process research and development, and stock-based compensation for acquisitions and the (inaudible) of stock-based compensation required by FAS 123R, partially offset by tax effect of these items.

For a detailed reconciliation of these financial measures, please see our website at www.packeteer.com under company, investors, conference calls. In accordance with SEC guidelines, the presentation of non-GAAP financial results should not be considered in isolation or as substitute for the company's financial results prepared in accordance with GAAP.

I will now turn the call over to David Yntema.

David Yntema - Chief Financial Officer

Thank you, Bradley. For the third quarter 2007, net revenues were at $36.4 million, which represented a sequential increase from the second quarter 2007 of approximately 12%. For the nine months ended September 30, 2007, revenues of $103.6 million represented an increase of approximately 1% from the similar period in 2006.

The Americas net revenues were down 41% of total net revenues for the third quarter of 2007, although the results from the first nine months were a more normal at 46%. Europe net revenues were 28% of total net revenues for the third quarter, close to the 29% of net revenues recorded for the first nine months of 2007. And Asia-Pacific net revenues were strong at 31% of total net revenues for the third quarter, compared with 25% in the first nine months of 2007.

Our top 10 customers accounted for 72% of total net revenues in the third quarter compared with 79% in the second quarter. Our largest distributor in the US, Alternative Technology, accounted for 22% of total net revenues in the third quarter, similar to the 23% for the full year 2006. Westcon, a distribution partner in North America and Europe accounted for 16% of total net revenues in the third quarter, slightly lower than the 18% for the full year 2006. No other customer accounted for more than 10% of total net revenues in the third quarter.

As you heard, all remaining commentary in this script regarding income statement margins, costs, and absolute profits will refer to non-GAAP results, which was defined earlier in the call. Gross profit margins were 70.5% of revenues in the third quarter, compared with 72% reported in the second quarter of 2007.

The quarterly reduction in gross margins resulted from a third quarter reserve for excess inventory for selective products of approximately $900,000, as we were not able to fully adjust our product build plans during the past nine months in relation to our lower revenue run rates.

We believe that our current build commitments and inventory levels are more closely tied to likely future revenues and expect that at some future point, we will be able to use this currently defined excess inventory.

Research and development expenses in the third quarter were $8.1 million or 22% of revenues, compared with 8.6% or 27% of revenues in the second quarter. The decrease was primarily the result of lower product development costs, including lower prototype in beta unit costs incurred in the third quarter.

Sales and marketing expenses in the third quarter were $14.5 million or 40% of revenues compared with $15.4 million or 47% of revenues in the second quarter of 2007. Sales and marketing expenses declined primarily due to the reduction of expenses in existing marketing programs, reflecting the impact of leadership changes and revisions to existing programs to make them more effective in support of our sales efforts.

General and administrative expenses in the third quarter were $3.2 million or 9% of revenues compared with $3.7 million or 11% of revenues in the second quarter of 2007. The reduction in expenses primarily reflected reductions in professional fees.

The operating loss for the third quarter was $240,000, compared with an operating loss of $4.2 million in the second quarter of 2007. We are very pleased to report a net profit of $682,000 or $0.02 per diluted share for the third quarter of 2007, compared with a net loss of $2.9 million or $0.08 per diluted share for the second quarter 2007.

Total head count was 456 at September 30, nearly identical to the totals for the past couple of quarters. Total cash comprised of cash, cash equivalents and investments was $79.7 million at September 30, 2007, compared with $81.4 million at June 30. The decrease in cash is due primarily to several decreased liability balances, primarily offset by lower receivable balances.

Trade receivables of $21.8 million at September 30 resulted in approximately 55 days sales outstanding compared to $24.1 million or 67 days reported at June 30, 2007. Our reported inventories, which are primarily comprised of finished goods, were $8.5 million at September 30, 2007, compared to $9.2 million at June 30th, primarily due to the increased excess inventory reserves.

Finally, although we have been able to report higher revenues and substantially improved operating results in the third quarter, our visibility remains constrained as we continue to successfully navigate our way through the previously discussed Packeteer product transitions. Similar to our comments at the completion of the second quarter, we do not plan to provide additional guidance at this time.

Nevertheless, as we continue to drive to once again deliver accelerating revenue growth rates on a consistent basis, we intend to balance carefully our needs to make prudent investments with the need to control expenses.

During the fourth quarter, we plan to significantly increase our investments in our sales and marketing initiatives, as well as our ongoing new product development programs to take advantage of our growing market opportunities. However, at the same time, until we retain our revenue growth momentum, we will continue to carefully monitor and limit lower priority expenses.

I'll now turn the call over to our CEO, Dave Cote, for some specific comments on the state of our business. Dave.

Dave Cote - President and Chief Executive Officer

Thank you, David, and thanks to all of you for joining us. We are encouraged by the significant improvement in our operating results during the third quarter, which we believe indicates a stabilization of our business. We are still in the midst of the iShaper product rollout and have a number of additional new products in the immediate pipeline.

As a result, we will continue to invest in the development and launch of those products. However, we'll also continue to monitor and limit lower priority expenses until we regain our expected revenue growth.

We saw significant growth in our Asia business, which represented 31% of revenues. EMEA was more balanced at 28% of revenue and the Americas represented 41% of revenues for the quarter, which was down as a percentage from Q2 of 2007.

Acceleration revenue represented approximately 40% of total product revenue in Q3 '07. Acceleration revenue includes iShapers, iShared, SkyX and PacketShapers with acceleration technologies, so is reflective of all the revenue with an acceleration component.

This year we have pointed to a changing and increasingly competitive landscape. More vendors are claiming to have WAN optimization solutions and while we view this as a clear validation of the large and growing market opportunity before us, this dynamic creates a high level of confusion and longer sales cycles.

The introduction of iShaper has significantly improved our position in today's competitive landscape. iShaper delivers very competitive acceleration features, but adds important functionality to deliver application performance for all enterprise applications, voice, video, and transactions, not just file-based applications, as well as key Microsoft brand services, all to deliver the most complete branch consolidation platform in the industry.

iShaper also greatly simplifies our messaging in the market, bringing together the most comprehensive solution for the delivery of all applications to the enterprise. We saw strong evidence of this in the third quarter as iShaper opened up more opportunities for us, both for iShaper and our other products. We have over 60 evaluations and proof of concepts underway with iShaper. The deals in the quarter that resulted from these efforts generated iShaper revenue, but perhaps more importantly, the iShaper opened more doors for us, some of which were better served with PacketShapers, iShared, or a combination of both. It is for this reason that we report acceleration revenue as the best metric for our growing success in the WAN optimization market.

iShaper is a platform from which we can more effectively sell our greater value proposition and gain access to a larger percentage of opportunities. For example, after evaluating the iShaper platform, Coogee Resources, an Australian offshore oil and gas producer, deployed iShaper, iShared, and PacketShaper solutions to ensure sustainable performance levels of critical business applications, backups, voiceover IP, and video conferencing across its offshore satellite and remote office network.

The company's remote iShaper devices now connect with PacketShaper and iShared devices at Coogee's head office via satellite and wireless network links. This enabled the acceleration and prioritization of individual business applications and file services across the company's entire wide area network. With these solutions, Coogee Resources is also able to maintain the optimum performance of bandwidth-intensive applications such as video conferencing while ensuring that other business critical applications are always available.

Another third quarter iShaper customer, a large architectural firm, was looking to consolidate servers and storage across its enterprise while prioritizing quality of service for its mission critical voiceover IP and video applications. Through the evaluation process, this customer recognized that with iShaper it could centralize all of its data for greater protection and ease of management, accelerate and optimize large AutoCAD files between all remote offices and maintain access to the full fidelity of Microsoft services from one appliance.

With iShaper deployments in seven of its remote offices, this customer is recognizing a significant reduction in operating expenses associated with its storage and server consolidation while ensuring the quality of service for voice and video applications.

Evident by recent third-party studies and independent testing, iShaper is quickly gaining recognition as the leading WAN optimization solution for network visibility, application optimization, and centralized management for multi-branch deployments.

In a recent study, Miercom Independent Testing Labs verified key advantages of the iShaper appliance, including deep visibility into traffic flows, easy-to-apply QOS to guarantee critical traffic such as voice, integrated Microsoft services such as print, SMS, domain controller, and centralized management for multi-branch deployments.

The report also examines some of iShaper's performance advantages around acceleration and caching and reveals the following: iShaper's SIFS acceleration offers a 65% or greater improvement in file access performance over the WAN and over 95% improvement in certain network conditions.

iShaper's wide dictionary caching provides customers with a 75% to 99% improvement on the cold hit and up to 99% improvement on a warm hit. In a Microsoft Exchange environment, iShaper provides customers with as much as 60% acceleration in response time for initial file request and greater than 75% bandwidth reductions during subsequent downloads.

This report provided conclusive evidence that Packeteer's acceleration results are comparable or better than other acceleration technologies in the market today. This recognition is particularly relevant as SIFS, TCP, and HTTP acceleration along with caching are key components of today's new competitive environment.

While we view acceleration and caching as only a portion of a much broader opportunity to offer intelligent WAN application delivery solutions, our ability to offer as good as or better acceleration and caching enables us to showcase the importance of our unique, advanced capabilities such as deep packet inspection and automatic application classification, detailed monitoring and statistics for all applications, as well as secure and highly granular QOS that provides customers strategic long-term solutions to maximize the return on investment for applications being delivered across their WAN.

In another independent study, Internet Research Group concluded that today's distributed enterprise branch office application delivery and optimization solutions must provide visibility into multiple classes of application traffic, as well as the ability to optimize or accelerate not just file traffic but voice, video, and transactional applications.

The study also recognizes Microsoft integration in WAN optimization appliances as a critical aspect of branch office solutions noting a widespread use of Microsoft platforms and applications and Microsoft's ongoing and increasing efforts to provide optimization and acceleration in the branch office.

iShaper delivers the complete solution for the branch office by leveraging Packeteer's core strengths: Our breadth and depth of technology for deep application visibility, secure QOS and acceleration; our time-to-market lead with the first Windows-based branch office solution and our relationship with Microsoft, as well as a loyal installed base and a well established channel.

iShaper changes the landscape for us, delivering the performance our customers need in a solution that enables the delivery of all enterprise applications. Both the Miercom and IRG studies are posted on our website.

As I mentioned above, there were a number of standalone PacketShaper and iShared installations as well. For example, longtime customer Tec Engineering, a business unit of Toshiba Tec Corporation, expanded its deployment of PacketShaper appliances in conjunction with a new rollout of iShared devices for better bandwidth utilization and to consolidate its two corporate data centers.

The company is also preparing to deploy iShapers. Tec Engineering originally deployed a PacketShaper for real-time bandwidth utilization monitoring of its corporate network. After learning about additional traffic acceleration and compression features in the PacketShaper, the company began a phased deployment throughout its entire enterprise network, and they can now quickly identify the cause of application performance problems anywhere in the network with a significantly reduced cost of WAN services.

Another customer, ROEL Construction, is deploying PacketShapers and iShareds throughout its network as it consolidates remote servers into a centralized data center. ROEL has noted that this deployment will dramatically improve application performance and eliminate the need for costly WAN link-upgrades and has cited an immediate improvement in throughput when traffic-shaping rules were applied.

With iShared's combination of WAFS acceleration, application-intelligent caching, a distributed file system and single-instance storage, and dictionary-based compression, ROEL has centralized its network architecture and eliminated the need for servers at remote offices.

As you may have seen in our press release, we recently announced the appointment of Raymond Smets as Vice President of Worldwide Sales and Marketing. Ray will lead our global sales and marketing teams, and brings seasoned experience from both the enterprise and telecom networking industries in sales, marketing, product and corporate development. We are pleased that we have found a high quality individual like Ray to head up our sales and marketing organizations.

We also announced the appointment of David Winikoff as Vice President of Product Management. In this newly created position reporting to me, Dave will bring together product management and product marketing efforts across all of our product lines. Dave's broad experience in communications and networking will help us to bring the next generation of Packeteer products to market with a strong competitive advantage.

We are very pleased with our new leadership in sales and marketing, and product management and believe these strategic hires will help us to strengthen the messaging around our leading value proposition and better penetrate our existing customer base, as well as (inaudible) customer opportunities.

Before I close, I'll provide several of the metrics you are used to hearing about. In the third quarter, there were 45 deals over $100,000, with an average deal size of approximately $184,000. This was down slightly from the just under 50 deals greater than a 100K in the prior quarter, Q2 2007, as well as just over 50 deals in the year ago quarter, Q3 2006.

In Q3, 60% of PacketShaper product revenue came from core units with the balance from edge units. The unit split was approximately 75/25 edge to core units.

In the third quarter, we continued the successful launch of the iShaper, experienced a clear stabilization of the overall business, and strengthened our organizational leadership with key new hires in sales and marketing, and product management.

Although our product transition programs are not yet complete, we have high expectations around the continuing rollout of our very competitive WAN Optimization product family and ongoing development of important future products. Our entire focus as an organization is to regain consistent acceleration of our business as quickly as possible.

Once again, thank you for your time. Now I'll turn the call back to David Yntema for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. If you would like to ask a question please press "*" "1" please have your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your request, you may press "*" "2". One moment please for the first question. Your first question comes from Troy Jensen with Piper Jaffray. Your line is open.

Troy Jensen - Piper Jaffray

Congrats on the improved results, gentleman.

David Yntema - Chief Financial Officer

Thank you.

Dave Côté - President and Chief Executive Officer

Thank you.

Troy Jensen - Piper Jaffray

Hey. So a quick update, did you guys say 31% of sales came from Asia-Pac?

Dave Côté - President and Chief Executive Officer

Yes.

Troy Jensen - Piper Jaffray

Okay. That's like an 82% sequential growth rate. Was it a couple of big deals that secured that or was that just broad-based strength over in APAC?

Dave Côté - President and Chief Executive Officer

It was broad-based strength. We have a guy that joined us about a year ago in Asia, and he has been gradually rebuilding that team, and I think he has just begun to see some real success starting in the third quarter.

Troy Jensen - Piper Jaffray

Okay. And then for David, linearity in the quarter, DSOs dropped, I think, 13 days or thereabouts, just curious what linearity looked like?

David Yntema - Chief Financial Officer

It was under 50% in the third month, Troy, 47% actually.

Troy Jensen - Piper Jaffray

Okay. What was that last quarter, curious?

David Yntema - Chief Financial Officer

It was actually the same last quarter.

Troy Jensen - Piper Jaffray

Interesting.

David Yntema - Chief Financial Officer

But it's interesting when it comes to DSO, it not only depends just on the last month, but obviously the second month as well, and also when the revenues actually occur during the third month.

Troy Jensen - Piper Jaffray

Great. Understood.

David Yntema - Chief Financial Officer

We are pretty pleased, but the good news is that, that puts us right back into our sort of target range of 55 to 60.

Troy Jensen - Piper Jaffray

Yes. And how about deferred revenues? That has historically grown, and I am just curious why that dropped this quarter?

David Yntema - Chief Financial Officer

Well, there is a variety of things that go into it. The vast majority of it is maintenance business as well and in the event we hang up any inventory that didn't sell all the way through the channel in the given quarter. So I don't think I would read a whole lot into it.

There is obviously some linearity in the maintenance business as well, but I don't think there is anything terribly meaningful in that.

Troy Jensen - Piper Jaffray

All right, last question, and I will leave the floor here. Can you give us any color at all, you are talking about significant increase in sales and marketing, and I know that historically you have typically had a big spike in the sales and marketing in the fourth quarter due to the commission accelerators.

I would guess this year probably we won't see the accelerators, but is there any color you can give us on how much you're going to bump up the sales and marketing line?

David Yntema - Chief Financial Officer

I can't really do that, Troy, except to say that we alluded to the fact that the numbers for the third quarter were not probably as high as we would have guessed. I mean that was (inaudible), and we have had some transition of people in there and we are trying to do some new marketing programs and there is a whole significant new thrust and so forth.

So, I can't give you any specifics in terms of growth, but you can assume that we are very energized in terms of developing programs that support the channel and the sales people.

Troy Jensen - Piper Jaffray

All right, guys. Good luck.

Dave Côté - President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Matt Robison with Ferris, Baker, Watts.

Matt Robison - Ferris, Baker, Watts

Let me add my congratulations on particularly given your product revenue, and what you did with the DSOs. Can you talk -- I think I only partially understood your answer on the deferred revenue, Dave. You mentioned the channel. How does that relate?

Dave Côté - President and Chief Executive Officer

Well, you know, we attempt to report revenue consistent with other companies that report their revenues on a sellout basis through the channel and you'll recall that in the event, for example, we sell into the channel and it doesn't sell through to a certain extent, we have limits in terms of the amount of inventory that we allow in a channel at any given point in time, so that we are more like a sellout process.

Obviously, we hang some up in that bucket from time to time, so there is some variability in deferred revenue as a result of that as well. But that's all I meant to talk about.

Matt Robison - Ferris, Baker, Watts

So.

Dave Côté - President and Chief Executive Officer

Does that help?

Matt Robison - Ferris, Baker, Watts

I think, it does, but is it still maintenance revenue that's associated with products that you would sell then?

Dave Côté - President and Chief Executive Officer

No, no, no, no, no. The vast majority of the number in deferred revenue at any point in time is maintenance contracts. You know, we sell one, two, three-year contracts typically, and then amortize them over the period where they are really serving the customer.

But it's also used in any event where we sell into the channel and we can't recognize revenue all the way through, so we will use it for that as well. But that's a very small piece of it.

Matt Robison - Ferris, Baker, Watts

Okay. So in the prior quarter, maybe you had some of that channel revenue that you deferred, and then this quarter it didn't happen so much?

Dave Côté - President and Chief Executive Officer

Yes, but as a practical matter, what you need to think about as well is what was the real revenue in any given quarter, and the real revenue in the quarter is what was reported, right?

Matt Robison - Ferris, Baker, Watts

Yeah. Got you there. Okay. Now the acceleration revenue, 40% sounds like a sequential improvement. I don't recall you giving that number for the June quarter. Do you have that handy?

Dave Côté - President and Chief Executive Officer

I believe it was 32 was the number we gave in the June quarter. So, yes, we have seen some improvement in the acceleration -- again, the class of acceleration components, both products and acceleration modules within the PacketShaper.

Matt Robison - Ferris, Baker, Watts

And can you repeat the headcount number for us?

Dave Côté - President and Chief Executive Officer

It was 456, Matt.

Matt Robison - Ferris, Baker, Watts

Okay.

Dave Côté - President and Chief Executive Officer

And by the way, on that, we'll try and double check on that number for you as well. Dave's checking. If not, the scripts are also on the website from the prior quarter.

Matt Robison - Ferris, Baker, Watts

Yeah, surely. Thank you.

Operator

Thank you. Our next question comes from Ryan Hutchinson with WR Hambrecht.

Ryan Hutchinson - WR Hambrecht

Good afternoon. Congrats on a nice top line here. I guess, first up, just in terms of the IRS issue that's outstanding, can you provide any update or color there, as a little bit more granularity would be helpful.

Bradley Gittings - Director of Investor Relations

Yeah. There is not a whole lot to report there, Ryan. As we acknowledged when we first received the assessment, we thought the assessment was relatively illogical and inconsistent with tax law and the facts of the case, et cetera, and that we expected at the end of the day to come out of it relatively clean. We also acknowledged that we had been talking to the IRS about what we considered their illogical position for well over a year at that time, and we continue to do that.

It would be wonderful from our perspective if there were an ability to solve the problem rather than going all the way through the appeals and the rest of the process, but if we have to do that, we are going to come out at the end of the day with absolutely no change.

If on the other hand, we can negotiate some kind of settlement, a very modest change from our perspective that doesn't cost us anything in the way of cash and maybe give up a few NOLs and allow them to feel better, that would be in the interest of the company as well.

You just don't know what's going to happen until it happens, but we will continue to talk and hope for the best. At the end of the day, if there is no solution, I mean, we continue to be confident that our position is absolutely the right position.

Ryan Hutchinson - WR Hambrecht

And any sense of timeline there?

Bradley Gittings - Director of Investor Relations

You are dealing with the IRS, so no clue in all honesty.

Ryan Hutchinson - WR Hambrecht

Understood. And then as it relates to the investments here in Q4, obviously this is a large addressable market, and you guys have been making investments there, but just how should we think about generally speaking the direction of the top line as we look into Q4?

I am assuming that based on the current pipeline and the investments to date, you guys feel pretty comfortable that we should expect that to be sequentially up in Q4?

David Yntema - Chief Financial Officer

Yeah. I would say, we are just not going to go down the path of guidance. I am sorry. We are clearly driven on a variety of things. Our primary goal, I know, Ryan, you have heard us say this before is top-line growth. So you can assume that that is clearly a goal of ours, and at some point, we would like to get back to our target levels of profitability as well.

We also are very pleased with our new sales and marketing and product management guys who we are convinced are going to help us in that goal, and we are continuing to invest heavily in other new products that you will be hearing about soon.

So I just can't answer your question, because we are not going down the guidance path, but we will continue to invest on the operating expense side of things with our goal of driving the top line.

Ryan Hutchinson - WR Hambrecht

Okay. And then finally just the typical competitive dynamic question, any changes there? Are you seeing more of each other with this Greenfield opportunity? And that relates primarily to the full-featured WAN optimization platform.

And then specifically, how often are you guys pulled into a deal where they have decided to go with one of your competitors, a Riverbed or Blue Coat, but they pull you in with the rate shaper product for network visibility and QOS capabilities?

Dave Côté - President and Chief Executive Officer

Yeah. On the first general comment, I don't know that the landscape has changed very much. I think it continues to be as it has through most of this year to be a fairly competitive environment.

I guess the other comment, which -- let me see if I got the question right, that they had a competitor's piece of equipment and brought us in as a complementary piece of equipment?

Ryan Hutchinson - WR Hambrecht

Correct.

Dave Côté - President and Chief Executive Officer

So they would have both?

Ryan Hutchinson - WR Hambrecht

Correct.

Dave Côté - President and Chief Executive Officer

Not a lot.

Ryan Hutchinson - WR Hambrecht

Okay.

Dave Côté - President and Chief Executive Officer

There's not a lot of that going on that I have seen.

Ryan Hutchinson - WR Hambrecht

Fair enough. Okay, thanks, guys.

Operator

Thank you. Our next question comes from Richard Sherman with MKM Partners.

Richard Sherman - MKM Partners

Yeah. Hi, Dave and David, good afternoon. Congratulations as well. I guess, I wanted to bounce, I guess, a couple things off of you. It sounds like you got a little bit less sales and marketing expense here, because you terminated or turned down some of the old programs and so we got a little bit of a hiatus here before the expenses pick back up as the new leadership implements some its new go-to-market and advertising and other programs. Is that a correct assessment?

David Yntema - Chief Financial Officer

I think that's fair. I think the one other thing that probably affects it is Q3 tends to be a little bit lower marketing spend in general, because you think about August in Europe, you don't really want to spend a lot of money on things.

And so there is a little natural seasonal change, but I think you have also characterized it right, that we are going through a bit of a transition and we are certainly going to kind of crank things up as we have the new leadership.

Richard Sherman - MKM Partners

Okay, thank you, David. And then I guess on the maintenance line or the services line, it's been kind of an easy thing to project. It sort of grows about $800,000 per quarter. And then this quarter, it grew a little bit less than that.

It was just up fractionally. And then we look to the deferred, the deferred number was a little bit maybe less robust. Is there some kind of sort of upgrade cycle or product transition off of older platforms in newer platforms that's ongoing here, that's affecting those two lines?

David Yntema - Chief Financial Officer

No, actually not. I wish that were an easier line to project. Quite frankly, there is some – well, there's a lack of predictability in terms of when people renew as well, and which is one of the issues, sometimes people renew early, sometimes late, and you can't tell and so it is less predictable than maybe it's looked historically. I don't think there's anything else that you can really read into it.

Dave Côté - President and Chief Executive Officer

Yeah. I would agree with that. I mean, I think, there are times when certain periods where for whatever reason, there may be more or less maintenance business occurring and the renewals then affect it as well. I think, Dave's right. It's not as predictable as it seems.

Richard Sherman - MKM Partners

Well, so there is not any kind of mechanical change where you are trying to push somebody to an upgrade cycle, and therefore you had some…

Dave Côté - President and Chief Executive Officer

No, no, no.

Richard Sherman - MKM Partners

Okay good. And then maybe, SSL, in the new products coming out, are there some things here that will lead you to handle SSL in a different or more advanced fashion than today?

Dave Côté - President and Chief Executive Officer

I guess, I don't quite understand the question there. I mean, we have talked about in an upcoming release of iShaper and iShared dealing with encrypted https traffic, but if it's beyond that, I am not sure what you are looking for.

We also encrypt the data in the branch appliances, so there are a couple of things that we are already doing. I don't know if there's more you are asking there.

Richard Sherman - MKM Partners

I guess in terms of getting visibility into SSL streams? At least as I understand it, your ability to classify traffic is among the best in the business and then when you get to a sort of encrypted traffic, you lose some of that visibility into it, and that gets sort of partitioned into a class or into a grouping that's, for lack of a better term, for the layman's terms, that's encrypted traffic.

And so we sort of put that into a certain priority level. I was wondering if you would be able to dig into the SSL tunnel in a little bit more detail to provide better or more granular policy control over specific SSL streams?

Dave Côté - President and Chief Executive Officer

Yes. So there is work going on at the both the stream level, as well as what I would describe as behavioral classification, looking at how the traffic behaves independent of sort of what you can see from the standpoint of protocol, et cetera, so there is work in kind of both those areas to provide more granularity in dealing with SSL.

Richard Sherman - MKM Partners

Okay.

Dave Côté - President and Chief Executive Officer

But nothing, I mean nothing to announce. It's sort of ongoing classification work.

Richard Sherman - MKM Partners

I understand. Okay, Dave. Thanks very much.

Dave Côté - President and Chief Executive Officer

Yeah.

Operator

Your next question comes from Bill Choi with Jefferies. Your line is open.

Bill Choi - Jefferies

Thanks. Hi, guys.

Dave Côté - President and Chief Executive Officer

Hi.

Bill Choi - Jefferies

Are you able to provide a specific number for iShaper? You did that last quarter, 300 to 400,000?

Dave Côté - President and Chief Executive Officer

Actually, I didn't last quarter and we are not going to this quarter. I said a small numbers of hundreds of thousands, I think was what I said. So, you have chosen 300 to 400, and we are not, and I think largely because of my comments earlier, that I think that, first of all, we are still kind of ramping iShaper, but second it's impacting our business across the board.

So it's not only an iShaper deal that may pull along PacketShapers and iShared, but an iShaper deal that the customer says, "You know what, we want to manage our server resources separately from our network resources, so we are going to buy both products." So I think the acceleration number as a percentage is probably a better metric of how that piece of our business is doing.

Bill Choi - Jefferies

Okay. And also can you give the average deal size again, and were there any $1 million deals?

Dave Côté - President and Chief Executive Officer

The number was 184,000 was the average, and I don't know, if there were any million plus deals, I don't believe so.

David Yntema - Chief Financial Officer

Yeah, I am not aware of them either, Bill.

Dave Côté - President and Chief Executive Officer

There were some in the 500 to 1 million range, but I don't think there were any million deals.

Bill Choi - Jefferies

Right. I remember, you guys said don't read into this number too much, but all of the prior couple of years, you have been at much higher numbers. So I just kind of wanted to look at what might be keeping this overall number lower here.

You are introducing a couple of new products in the second half, two of which kind of caught my attention is the new multi-gigabit architecture and central management platform. Do you have an updated timing of when that will be available? And is that going to move some large deals into closing?

Dave Côté - President and Chief Executive Officer

That's a lot of questions. Let me see if I can get at them. First of all, on the large deals, I really do caution you not to read too much into it. I believe, I said the number was 45, I think, it was 49 last quarter, so just under 50, as I said.

So down 4 deals quarter-on-quarter, so not a big number. It was just a hair over 50, I think, last year, so not a big difference there. The other thing I have tried to caution people on is it's a snapshot of revenue in the quarter for a given customer.

So there are, within that, a number of ongoing rollouts of multi-million dollar customers, it's just that they buy 200, 300, 500 during the quarter. So I guess just in general, I think, it's an indicator of our business, and I think certainly something to look at, but I really will caution you to read into it at a very granular level.

With respect to new products, we really aren't commenting on those new products. What I tried to say last quarter in that commentary was just directionally high performance platform, improved central management, those were two directional things we were looking at, and you will hear more from us in the short to mid-term on those products, but we are not going to comment on specific products.

Bill Choi - Jefferies

Right. I think, the expectation was to introduce them by the end of the year. Is that still correct?

David Yntema - Chief Financial Officer

Yeah. We talked about having more to say about them, but we were more trying to give color on what's coming and so stay tuned. But we will have something to say about them. It doesn't mean that the products are going to be here.

Bill Choi - Jefferies

Okay. And looking at the R&D, I look at the pro forma numbers, but it was down sequentially in third quarter. You have got these products coming out. Is fourth quarter the major increase in R&D spending for beta testing, and et cetera? And how significant is that?

David Yntema - Chief Financial Officer

Okay. So I can't go down the path here in terms of a real guidance, again, but we did acknowledge obviously the numbers for the spend in R&D in Q3 were certainly down, and there is a variety of things that goes into that category. Obviously, headcount is a big one. The other thing, when you are dealing with new products as well is there is a bunch of evaluation and prototype units and new designs, et cetera, and those just occur in various periods.

I did have some very specific comments, though that we -- as we are moving towards some of these new products, et cetera, that you should expect more spending in that area. But I just can't go beyond that, Bill.

Bill Choi - Jefferies

Okay. Also, Dave, can you provide an update on your pipeline activity? I think, if I recall, last quarter we concluded that pipeline at the end of Q2 was higher than it was in Q1. Any sense for pipeline right now and how is deal closing rates now that iShaper is available?

Dave Côté - President and Chief Executive Officer

Yeah, I don't have a lot of color on that. I mean, I think that the pipeline continues to strengthen, as I said. iShaper, I think opens more opportunities for us in general, both iShaper and ultimately other products.

But I think, the more commentary on that, the closer it comes to guidance. So I would rather not give you a lot more color on what's going on there.

Bill Choi - Jefferies

Okay. one last (inaudible), David, can you provide a breakout of the deferred rev between short-term and long-term?

David Yntema - Chief Financial Officer

I do not have it actually, but you will find it when the Q comes out, which hopefully is very soon. So I didn't bring that with me, Bill.

Bill Choi - Jefferies

Okay. Thanks.

Operator

Your next question comes from Christian Schwab with Craig-Hallum Capital Group.

Christian Schwab - Craig-Hallum Capital Group

Yes. Great. Thank you. Good quarter. Just so we're on the same page, what do you believe your historical rate of revenue growth would be on a year-over-year basis when you return to it?

Dave Côté - President and Chief Executive Officer

Yes. I guess if you go back over the last five years, it's probably been somewhere between low 20s to 30%, is kind of what it's been in the past. We'd certainly expect that and obviously we have a goal for higher than that.

Christian Schwab - Craig-Hallum Capital Group

Perfect. On the gross margin side of the business, is your gross margin targets going to be any different than they are today after the product transition is complete?

David Yntema - Chief Financial Officer

No, I really don't think so. It's been interesting, but sort of the target that we've had for several years now at 72% we still think is reasonable in the long term.

Christian Schwab - Craig-Hallum Capital Group

Great. And then exiting this year, the majority of the product transition is going to be complete?

Dave Côté - President and Chief Executive Officer

Well, I mean I think with respect to iShaper, yes. We feel like we'll have that pretty well in the marketplace and launched, but as we sort of alluded to, we have a number of new products coming.

So, but in the context of getting out this unified platform for visibility, QoS, acceleration, etcetera. Yes, I think end of year is probably a reasonable timeframe to be looking at that.

Christian Schwab - Craig-Hallum Capital Group

When I spoke to some Microsoft people, they were excited about a platform that’s going to leverage their server 2008 operating system software, is that A new product or were they referring to the iShaper? I couldn’t find it in my notes.

Dave Côté - President and Chief Executive Officer

I really can’t comment on any kind of new product activity there, but I mean it’s, it certainly would be related to the iShaper.

Christian Schwab - Craig-Hallum Capital Group

Okay. But possibly not out yet?

Dave Côté - President and Chief Executive Officer

I’m trying not to be too cagey. We have been pretty clear, we’re going to track Microsoft’s operating systems and so we said that we will support the Longhorn operating system, which is essentially the Windows Server 2008 platform. It’s just a matter of timing and what platform we support that with.

Christian Schwab - Craig-Hallum Capital Group

Are you seeing any significant pull-through of lead generation from Microsoft to you yet?

Dave Côté - President and Chief Executive Officer

Some, and it's probably more regional, so certain areas that have connected well with the field force, I think we're seeing more of them than others, but they sort of have just gotten back from their hiatus in September.

I don't know if you know, they sort of, July and August is pretty quiet for them, so we did a lot of work with their marketing folks to get materials together and things. So, I think good timing for the end of the year.

Christian Schwab - Craig-Hallum Capital Group

And then just basic head-to-head competition, we’ve kind of given metrics before when you’ve competed against Riverbed. Do you have an update on your ability to win when you go head-to-head with them with the iShaper now?

Dave Côté - President and Chief Executive Officer

No, I think it's too early to tell. The one thing I have said in the past, is that if the customer sees value in the full, complete solution from us, I think we win a very, very high percentage of the time.

So as we said, visibility in our granular QoS, so if things like voice and video and transactions matter to them and not just files, then we have an extremely high rate. In fact, with many of those cases I don't see Riverbed in those deals.

Pure head-to-head acceleration, I think it's too soon to tell, we think the iShaper is extremely competitive as we've said, and the work that we did to get the information out of the Miercom lab test, where they looked at our product, we think we're very competitive.

So, on an ongoing basis, we think we'll be very good head-to-head, but I will tell you that the best opportunity is if they need more than just acceleration, because that's when our uniqueness really shows.

Christian Schwab - Craig-Hallum Capital Group

Right. And then lastly here, do you feel any different about the market and your visibility than you did in July?

David Yntema - Chief Financial Officer

No, I don't believe so. I think it's still good, big opportunity. I think that we don't have any more visibility into deals happening or not happening. It's essentially still book ship business and I don't think the market conditions have changed at the competitive level or at the customer level either.

Christian Schwab - Craig-Hallum Capital Group

Okay. Because back then you guys were a little bit more forward about returning to growth in the second half of the year and you just didn't know the granularity and that was the reason, part of the reason I took away for determining to suspend providing guidance at the time.

So, are you just waiting until your full complement of products are out in the marketplace before you return, if you so choose to, give quarterly guidance again? How should we be thinking about that over the next two to three quarters?

David Yntema - Chief Financial Officer

Well, on the latter question, I'm not sure how to answer the former one. On the latter one, if we return to guidance, it will be at some future time. But, I mean it's, you shouldn't expect necessarily that next quarter or the quarter after or whatever is, is a target for us.

Christian Schwab - Craig-Hallum Capital Group

Great. Thank you.

David Yntema - Chief Financial Officer

Okay. Thanks.

Operator

Your next question comes from Samuel Wilson with JMP Securities. Your line is open.

Samuel Wilson - JMP Securities

Good afternoon. Two questions for you. One is what was CapEx for the quarter and when is you expecting it sort of to be on a run rate basis here. And, second, it’s been quite a number of quarters that you’ve had this Microsoft relationship. Would you characterize it’s gone better than expected or sort of worse than expected? Thanks.

David Yntema - Chief Financial Officer

Sam, I’m going to let Dave field that second one and I am looking furiously for CapEx to see if I can give you an answer. So, Dave.

Dave Côté - President and Chief Executive Officer

Yes, on Microsoft, I think it’s gone about what we expected. I mean, I think we did not go into this with any illusion that a company the size of Microsoft was going to simply turn over all their leads.

They are still a company that goes out and sells servers and we are their solution when the customer says, yes, I like your servers, but I’m going to consolidate them. So, it’s in that context that we sell with them. I feel very good about the relationship with the server-marketing group and I think that the field relationships are improving.

I think as I said in an earlier discussion,they’re better in some places than others, but I think in general it feels like it’s where we thought it would be.

David Yntema - Chief Financial Officer

And on your specific questions, Sam, on CapEx, for the last couple of quarters it’s been under $1 million each of the quarters.

Samuel Wilson - JMP Securities

And would you expect that on a go-forward basis?

David Yntema - Chief Financial Officer

Yes, I’m not going out on that for guidance either.

Samuel Wilson - JMP Securities

Okay. Thank you.

Dave Côté - President and Chief Executive Officer

Okay.

Operator

Thank you. Your next question comes from Manuel Recarey with Kaufman Brothers.

Manuel Recarey - Kaufman Brothers

Good afternoon. Thanks for taking my question. David, can you repeat the comments you made about the gross margin? It was negatively impacted, I thought, by some write-off of excess inventory?

David Yntema - Chief Financial Officer

Yes. As we’ve been adjusting our build plans, particularly after the first couple of quarters with a change in, a rather significant change in product revenue growth, et cetera. I mean, we’ve been modifying our overall build plans, which you have to put in place and build your product well in advance.

By the end of the third quarter, we concluded that we had more of some of the products than we needed. It’s good product and so forth, but it falls outside of the targets that we’re going to need over the next few quarters and so we reserve that as what’s called excess. It’s not obsolete.

We do think we’re going to be able to use it somewhere down the road, maybe a few quarters down the road, it’s good product. So whether that’s three quarters, four quarters I don’t know, but that number that we indicated, we made a reserve for was $900,000.

Manuel Recarey - Kaufman Brothers

Okay. So if you adjust the course of sales for that, your pro-forma gross margin was close to 75%?

David Yntema - Chief Financial Officer

I don’t know. I haven’t done that math. You can do that, I just gave you a specific number.

Manuel Recarey - Kaufman Brothers

Okay. And it was 900,000, you said?

David Yntema - Chief Financial Officer

Correct.

Manuel Recarey - Kaufman Brothers

Okay. I was going to ask the question, forward-looking question, but you're not going to answer that. I won't even try. So I have one more question. You did add a couple people to the management team. Are there any other areas that you feel -- that need to be filled?

David Yntema - Chief Financial Officer

We're still looking in some areas of both sales and engineering, I would say. A little bit in marketing. So I mean, there are some positions open just about throughout the company, support as well. So, I don’t think there’s any particular area where we are heavily concentrating and based on some of our earlier comments, we are looking at everything very, very closely to decide if it’s something we really have to have. But I think there are some positions open in just about every department of the company.

Manuel Recarey - Kaufman Brothers

Okay. Thanks.

David Yntema - Chief Financial Officer

Thank you.

Operator

Your next question comes from Rohit Chopra with Wedbush Morgan.

Rohit Chopra - Wedbush Morgan Securities

Thank you. I had a few questions, if you could help me out here. So, I want to come back to competition, you mentioned something about lengthening sales cycles. Can you sort to compare that year-over-year where are we now and where were we last year as far as the sales cycle?

Dave Côté - President and Chief Executive Officer

It’s really tough to do. I mean, I think, I have said in the past, its added anywhere from 30 days to maybe as long as 60 days for people to kind of do that initial sorting. I would say, in the first quarter it was definitely closer to 60 days and I think it’s moderated some now as people understand a little bit more of the landscape.

But I still think that there is more competition and therefore there is probably more proof-of-concept evaluation kind of work going on. It would be tough to characterize it more than that year-on-year.

Rohit Chopra - Wedbush Morgan Securities

Okay. And in the quarter, can you point to any weakness in any verticals that you may have seen?

Dave Côté - President and Chief Executive Officer

Not really. I suppose the only area is in Federal, which is not a huge part of our business, but the typical end of year for Federal, I think it has become sort of a moving target in some cases where they get sort of dispensation to move the end of year for them somewhere in October.

So I still think -- I don’t think you get that sort of sharp edge that you used to get with the end of the third quarter. Again, it’s not a big part of our business, but that’s probably the only vertical I saw where there was some, just sort of, movement back and forth of that timeline.

Rohit Chopra - Wedbush Morgan Securities

All right. And another question here, it gets back to -- you have got a new leadership in the sales and marketing area and I wanted to try to get a little bit more detail on, maybe point to something that’s actually going to change that will help Packeteer significantly. What’s going to be done differently now than what was done in the past that’s going to make you more competitive?

Dave Côté - President and Chief Executive Officer

Well, I think that’s a hard one to say because I think there is an awful lot of things that are in the way someone manages and leads. I think in the case of our new sales leader, sales and marketing leader, I think he brings a perspective from his experience in both enterprise and telecom, that’s important going forward in terms of his leadership and management and his view of strategy and selling.

How that exactly translates is a little tough to say. On the marketing front, I think he definitely brings a -- well, first of all, putting marketing and sales together means you really end up with a more cohesive approach to go-to-market. So your awareness building to closing of the sale is really under one person’s guidance and will be by virtue of that a more integrated effort.

So I think that helps a lot. On the product management front, I think a big difference is a stronger, probably a stronger focus on business case. Fairly traditionally, in technology businesses, product management is often times a fairly technical organization and I think our guys are no less technical, but I think that Dave is going to bring a stronger sense of balance of what I call whole product.

So, not just the engineering effort to build the product, but everything that goes around it, and so I think we will have a better focus on, as I say, the whole product. Those are, I think a couple of areas that I think will be different.

Rohit Chopra - Wedbush Morgan Securities

All right. Two more quick questions. One, do you think currency had an impact in your international markets helping boost some sales in Asia or even in Europe?

David Yntema - Chief Financial Officer

No, I don’t think it had any effect at all, Rohit.

Rohit Chopra - Wedbush Morgan Securities

Okay. And the last question is a little bit more difficult and try not to get too defensive about it, but I want to try to understand what is the difficulty at Packeteer? You have been in the business for 10 years now, what is the difficulty at Packeteer whereby you don’t have the visibility to give guidance, yet younger companies who are just entering this business or let’s say its Riverbed and they have been there for five years or even younger companies are able to provide that guidance.

And even though it may not be right and they are sandbagging or it doesn’t make a difference, but what is it that -- is it management application systems, is it the lack of something that is giving you no visibility to give guidance? I just want to try to understand this and why a company that’s been in the business for so long won’t be able to provide guidance?

Dave Côté - President and Chief Executive Officer

Well, let me try to answer that. I mean, first of all, the main reason we suspended guidance was after giving guidance for a couple of quarters and being wrong, we said, Gee, maybe we don’t have a complete understanding of what’s going on vis-à-vis product transition, etc.

But if I go back to when we were giving guidance, you will recall and others may recall that we have always said guidance is difficult in a business that’s book ship and driven through the channel. We don’t have backlog and so when we provide guidance, we’re not doing it on some percentage of our business that’s already booked for the quarter.

And our guidance in the past has been somewhat qualitative in providing sequential commentary from one quarter to the other on revenue and earnings, not specific numbers. And I don’t think that would ever change even if we go back to guidance at some point.

But I think part of it has to do with how much you really -- you really want to kind of go out on a limb when your business is not a hard booked business, which some places are. Some industries, you are booked 60% out in the quarter, you can give a more discreet number. But, I think we’re just trying to be prudent and frankly not be wrong, if we are going to go give guidance.

David Yntema - Chief Financial Officer

And I'll add to that. I just, I have never felt there was much value in it either, Rohit, so to be perfectly honest, I sort of like this method right now a whole lot. So, whether we ever come off it, I don’t know.

Rohit Chopra - Wedbush Morgan Securities

I appreciate your honesty and thanks for the leeway with the question.

David Yntema - Chief Financial Officer

Sure. Thanks.

Operator

And our last question comes from Erik Suppiger with Signal Hill Capital. Your line is open.

Erik Suppiger - Signal Hill Capital

Congratulations.

Dave Côté - President and Chief Executive Officer

Thank you.

Erik Suppiger - Signal Hill Capital

Can you give us a little more color on the 60 evals that you’ve got going on? Have some of those been wins yet, or what is the status and who are you up against in those deals?

Dave Côté - President and Chief Executive Officer

Yes, 60 is an approximate measure of what are ongoing right now. There are probably about, I think there were 15 or 20 that actually have completed and I know your question is going to be what is the win rate on that and I don’t know what it is offhand. So the 60 would represent sort of ongoing evals in the works right now.

Erik Suppiger - Signal Hill Capital

Why have you won the 15 or 20 that you’ve got?

Dave Côté - President and Chief Executive Officer

Again, I think it comes back to this point I have made earlier, which is when people are looking to try to optimize the performance of all their applications and see value in our deep visibility and see value in protecting the performance of transaction-based applications or voice or video, we win.

And I would say that, that in 90 plus percent of the cases, if that’s what they are looking to do, we win those deals. We have a lower percentage win rate when it’s a pure acceleration deal and the reason I don’t have a lot of color on how many of those there are is that every time we are doing an acceleration deal now with the iShaper, it’s automatic that you see what’s on your network.

So, we have -- it’s one of the real advantages of the iShaper being an integrated platform is that now as you’re doing a compression test and again we believe we will be very competitive in that, but it’s sort of part of that test that you can show the customer, by the way here's what's running on your network. And so we attempt to turn every opportunity into a full application kind of view.

Erik Suppiger - Signal Hill Capital

And who were in some of the 15 to 20 deals that you’ve won?

Dave Côté - President and Chief Executive Officer

The primary guys, I would say, are Riverbed and Cisco, and not always both of them, but one or the other. And I would say if I oversimplify it, where we lose to Cisco, it’s pure account control. That’s a Cisco account and the customers sort of dyed-in-the-wool Cisco.

And by the way, some of those have actually come back, because the customer just doesn’t get what they need. On the case of the Riverbed one, if the customer just says, all I care about is files and they do a comparison and they are 5% better, let's say, then they might win that deal. But if there is any other consideration, it just improves our chances.

Erik Suppiger - Signal Hill Capital

And then what’s the status of training your channel with the iShaper? Do you feel like you are making some progress there, or do you have long ways to go and how long once you are into the training, how long does it take to get them to start ramping with the sales?

Dave Côté - President and Chief Executive Officer

Yes, I think that we are where we had thought we would be. Our sort of general game plan was to train the bulk of what we call our go-to partners over the course of the first sort of six months, Q3, Q4, and I think we're kind of halfway through that and I think we’re making good progress. So that feels pretty good.

My guess is that once trained, it’s still going to require them to participate with us in some of the early deals to really feel comfortable with sort of how it’s going to operate in the environment, et cetera. So, I guess for the guys that got trained, at the beginning of the quarter they are going to be capable here sometime during this quarter. So it’s probably, I guess, about a quarter lag after somebody is trained before they become more self-sufficient.

Erik Suppiger - Signal Hill Capital

Okay. And has Microsoft been doing much in terms of seminars and marketing initiatives like that?

Dave Côté - President and Chief Executive Officer

Yeah, in different places. We’ve been participating with them, I know in Australia and parts of Europe, we did some in September in Australia, it was actually, I think in the earlier part July timeframe, and I know there are plans in the U.S. this quarter. So there’s number of different things that we're participating with them on.

And there are some collateral (inaudible) that talks about their solutions. And as I alluded to, I think, in another question, they certainly want to sell Microsoft server, so they are not going out advocating in all cases to do server consolidation, but I think they’ve also recognized that is a requirement, and so they have as one of their scenarios for branch deployments, server consolidation scenario and that is Packeteer. And so, they use us as the prime example in that. So that obviously is where we’re piggybacking on their joint seminars.

Erik Suppiger - Signal Hill Capital

And have you been bringing on some new Microsoft resellers at this point?

Dave Côté - President and Chief Executive Officer

Yes. Some of our partners already were, they had Microsoft practices, and so obviously those were where we went first. And then looking really at coverage and understanding in a given either territory in the U.S. or country throughout the world do we have enough of the right Microsoft partners, and so that’s been an ongoing effort.

And, yes, we've brought on additional Microsoft partners. In fact, it’s probably the only area we’ve really recruited new partners. We have a pretty broad channel base and where we’ve added new people, it’s been in people who can bring Microsoft practices to the game.

Erik Suppiger - Signal Hill Capital

And you said, Microsoft is going to be working with you in the U.S. starting in Q4, or not starting, but more so in the U.S. in Q4?

Dave Côté - President and Chief Executive Officer

Not starting. I just think there are some seminars that are going on in Q4 in the States that that we will participate with them. And I think that’s an ongoing thing whenever their branch marketing team is doing something, we’re looking for how do we participate. And I think they are looking to have us participate where it makes sense.

Erik Suppiger - Signal Hill Capital

Why were the U.S. revenues down?

Dave Côté - President and Chief Executive Officer

I don’t know. I wouldn’t read a whole lot into that. It kind of fluctuates. David made the point that it was down in the third quarter, but about at its typical percentage for the first nine months, I guess. There’s nothing that I would look to, had a lot of questions from various investors about, gee, is it¸ whatever that is, the subprime financial markets? We aren’t seeing anything specific in the U.S. enterprise space that leads us to say that there is something going on. So I think just chalk it up to quarterly fluctuations.

Erik Suppiger - Signal Hill Capital

And lastly, there has been a fair amount of filings from activist shareholders recently, can you comment as to whether or not you have dialogues with activist shareholders or are there any thoughts in terms of discussions about maximizing shareholder value?

David Yntema - Chief Financial Officer

No. there are a couple that have registered as activists. One has certainly reduced his position as of late. We talk to all shareholders quite frankly, and we listen to their perspectives as well and we try to keep an open communication channel.

To be honest, I suspect, I speak to the two guys who represent the activists more than others and it’s just because of their nature, they have more they'd like to talk about and so forth. So we listen and so forth and we respect other people's views. I don’t know if that answers your question, but that’s about all I can say about shareholder communication.

Erik Suppiger - Signal Hill Capital

You do have ongoing dialogues with them though?

David Yntema - Chief Financial Officer

You bet. Absolutely.

Erik Suppiger - Signal Hill Capital

Very good. Well, congratulations. Thank you.

David Yntema - Chief Financial Officer

Thank you.

Dave Côté - President and Chief Executive Officer

Thank you. Kim, if there are any other questions please let them ask a question.

Operator

Okay. Thank you. Our next question is from Jesse Cohn with Elliott Associates.

Jesse Cohn - Elliott Associates

Interesting timing I suppose.

Dave Côté - President and Chief Executive Officer

Yeah. I thought that was great, Jesse. He wanted to introduce you, I guess.

Jesse Cohn - Elliott Associates

I have no desire to talk to you guys. No, my questions were answered. Thanks a lot.

Dave Côté - President and Chief Executive Officer

Okay. Good.

Operator

And our next question comes from Cameron Cooke with Janco Partners.

Cameron Cooke - Janco Partners

Yeah, I was wondering if you have just a rough idea of where acceleration may settle out relative to PacketShaper?

Dave Côté - President and Chief Executive Officer

It’s really tough to say because it isn’t against PacketShaper. I mean its acceleration modules on PacketShaper as well. So it’s hard to know, we’re watching it and we'll see where it ends up. But I don’t think we have a particular view of where it stops.

Cameron Cooke - Janco Partners

Thank you.

Operator

And our last question comes from Paul McWilliams with Indie Research.

Paul McWilliams - Indie Research

Hi, guys. Thanks for taking my question. Congratulations on setting the baseline up a little higher. On pro-forma gross margins for products, a gentleman mentioned earlier that it comes out to 74.7%, and that’s down from the typical. Is that due to mix, due to competition? Anything you can put your finger on there?

Dave Côté - President and Chief Executive Officer

It’s actually not down from the typical. I don’t believe in the last couple of quarters it's been more than 72, 73% range. People are looking for numbers, let’s see.

Paul McWilliams - Indie Research

Well, I am going from last year, I’m sorry. In the last few quarters, yes, it is up.

David Yntema - Chief Financial Officer

Yeah. I think it has been drifting down a bit over the last bit of time and I think we’ve kind of said on an ongoing basis that our target is kind of low 70s as a percent. And we've had situations where it has been higher than that, more from a mix standpoint. I continue to believe that as we drive more branch locations, they have a slightly lower gross margin and we’re going to continue to sort of see it in that lower 70s kind of range. So, not to say we won’t have a quarter with mix changes and we go back to 74, 75. I mean, it could -- certainly could happen. As you pointed out, that’s sort of what it would have been in this quarter. But I think we still will consistently guide to more like 72 as sort of the general long-term model.

Paul McWilliams - Indie Research

Got you. Service gross profit was down a bit from what it was last year at, let’s see, was 70%, last quarter it was 73, and last year it was running typically 72 to 74. Any comment on that?

Dave Côté - President and Chief Executive Officer

Well, that’s an interesting area where we have worldwide support, of course, and there is always the need, I mean, if you will, to support customers where you could find your way to invest significantly more all the time. So I wouldn’t read too much into that. We invest in that area as we can, as we find it’s affordable, et cetera, and there will be some little variance. I think arguably if you listen to our support guy, he tells us it’s too high. We should be investing more money. But there will continue to be some variance there. We see opportunity; that’s one of the areas when we talk about investing in expense levels, et cetera, one would be in R&D, the other is clearly in the sales and marketing line, and the third is customer support. And we’ll just do it as we are able and you may see a little bit of fluctuation in that.

Paul McWilliams - Indie Research

Okay. On the IRS expense for the quarter, did you record any expense for the quarter of notice?

Dave Côté - President and Chief Executive Officer

No.

Paul McWilliams - Indie Research

Okay. I mean in supporting your ongoing efforts to fight this?

David Yntema - Chief Financial Officer

Oh, I'm sorry. Then I misunderstood your question. Obviously, we have outside tax and legal help, et cetera, and certainly that’s ongoing. That’ll probably be ongoing even after the conclusion of this thing because you have to have outside expertise.

Paul McWilliams - Indie Research

Yeah.

David Yntema - Chief Financial Officer

So there is nothing terribly meaningful in that regard, but sure, we continue to have outside professional fees and so forth that we have traditionally used.

Paul McWilliams - Indie Research

Okay. But nothing terribly noticeable there?

David Yntema - Chief Financial Officer

No, no.

Paul McWilliams - Indie Research

Okay. Going over to Asia, that’s an all time record for revenue for Asia, at least in what I’ve recorded, by a substantial percentage, maybe 25% higher than the next quarter.

Dave Côté - President and Chief Executive Officer

Yes.

Paul McWilliams - Indie Research

How do we clone the guy? How do we duplicate it? Is it because competition there is easier or is it because the economies there are growing faster?

Dave Côté - President and Chief Executive Officer

Well, I guess, well, first of all, we have a guy that runs Japan who has been with us for a number of years and has solidly run that organization for a long time. And the performance in Japan was good. But the uptick was primarily in the rest of Asia, which is the gentleman I was talking about that joined us about a year ago. I guess, I would characterize without taking anything away from his performance, I would characterize it as that is a large and growing market where our largest geographies are primarily in Australia and Southeast Asia, which would be more mature markets.

We have not really tapped into the likes of China and India as yet, and so while again the numbers are outstanding numbers, it’s coming off a smaller base. And I think that what we do hope occurs is continued growth there as we've invested into those geographies and begin to have those be a more meaningful part of our business.

I’d say Japan is still kind of in the rough range of half of that territory, so the rest of Asia, I think there is just room for it to grow somewhat on the law of small numbers and somewhat on just the size and scope of those territories. I think my guy there would tell you the competition is just as heated there both from US companies as well as some smaller indigenous players.

Paul McWilliams - Indie Research

Very good. iShaper linearity. You mentioned that 47% of total was in month three. Was iShaper more accelerated towards the end of the quarter than the total?

David Yntema - Chief Financial Officer

Well, so, I don’t have those statistics, but given that we really introduced it for the first time in the last week for revenue of Q2 and so forth, it probably did ramp more towards the mid part of the quarter and so forth, but the eval units started going out. I mean they were starting to go out even at the end of the second quarter. Yeah, there probably is some of that, but I don’t know if that would -- I mean, that’s not unexpected, I would guess.

Paul McWilliams - Indie Research

Okay. What’s your -- for iShaper, what’s your typical sales cycle time going from eval to decision?

David Yntema - Chief Financial Officer

Well, I mean, I think it’s been anywhere from a short of 30 days to some are still ongoing that got started in latter July. So it may be 90. So I would say 30 to 90 is probably a realistic number.

Paul McWilliams - Indie Research

Okay. Your closed ratio for iShaper, can you give me any idea there?

David Yntema - Chief Financial Officer

No. Don't really know at this point.

Paul McWilliams - Indie Research

Okay. Another real quick one here. Are customers learning more easily, more quickl, or maybe requesting upfront about your visibility qualities, asking about DPI, the stuff that you do so very well?

David Yntema - Chief Financial Officer

No. Not anymore than normal, I wouldn’t say.

Paul McWilliams - Indie Research

Okay. And then two housekeepers here that I missed in the rapid fire prepared comments. Was revenue there included acceleration 47%?

David Yntema - Chief Financial Officer

40.

Paul McWilliams - Indie Research

40 even?

David Yntema - Chief Financial Officer

40 even.

Paul McWilliams - Indie Research

Okay. And what was the percentage top ten?

Dave Côté - President and Chief Executive Officer

Hang on a second. I think it was 72. Does anybody have that here?

David Yntema - Chief Financial Officer

It sounds right.

Dave Côté - President and Chief Executive Officer

72.

Paul McWilliams - Indie Research

Very good. Thank you very much.

David Yntema - Chief Financial Officer

Thank you.

Dave Côté - President and Chief Executive Officer

Thank you. This concludes the Packeteer third quarter 2007 financial conference call. Thank you for joining us today. If you have any additional questions, please feel free to call our Investor Relations line at 408-873-4422. Thank you.

Operator

This concludes today’s conference. You may disconnect at this time. Thank you.

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