Packeteer Q4 2007 Earnings Call Transcript

Packeteer (PKTR)

Q4 2007 Earnings Call

January 31, 20085:00 pm ET

Executives

David C. Yntema - Chief Financial Officer

Dave Cote - President and Chief Executive Officer

Analysts

Erik Suppiger - Signal Hill

Christian Schwab - Craig-Hallum

Manny Recarey - Kaufman Brothers

Steven Freitas - BMO Capital Markets

Paul McWilliams - Indie Research

Rohit Chopra - Wedbush Morgan

Doug Ireland - JMP Securities

Cameron Cooke - Janco Partners

[Manjal] - Jefferies

Presentation

Operator

Good afternoon, and welcome to the Packeteer fourth quarter 2007 financial conference call. (Operator Instructions) I would now turn the call over to your conference host, Mr. David Yntema, Chief Financial Officer.

David C. Yntema

Thank you. Our call today will begin with a summary of Packeteer’s financial results for the fourth quarter 2007. Dave Cote, our President and CEO, will follow this summary with an overview of our business. At the conclusion of these presentations, as you heard, there will bean opportunity for questions. Today’s call is being recorded, and 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 factors we currently anticipate may influence our results, going forward. These forward-looking statements include express 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 sections of our 10-K filed with the SEC 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 from acquisitions, the expensing of stock-based compensation required by FAS 123R, and the related tax impact of these items, as well as the impact of a charge related to the settlement of the company’s IRS tax examination.

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.

For the fourth quarter 2007, net revenues were $40.9 million, which represented a sequential increase from the third quarter 2007 of approximately 12%, equal to the sequential percentage increase from the second to third quarter 2007. For the year 2007, revenues of $144.5 million were approximately equal to those in 2006.

TheAmericas net revenues accounted for 43% of total net revenues for the fourth quarter of 2007. For the full year 2007, they were 45%, just below the percentage in 2006.

Europe net revenues accounted for nearly 31% of total net revenues for the fourth quarter. For the full year 2007, they were nearly 30%, approximately equal to the percentage in 2006.

And Asia Pacific net revenues accounted for 26% of total net revenues for the fourth quarter. For the full year 2007, they were 25%, slightly higher than the percentage in 2006.

Our top 10 customers accounted for 71% of total net revenues in the fourth quarter 2007 compared with 72% inthe third quarter. Our largest distributor inthe US, Alternative Technology, accounted for 23% of total net revenues for the fourth quarter, close to the 25% reported for the full year 2007.

Westcon, a distribution partner inNorth America and Europe, accounted for 16% of total net revenues inthe fourth quarter 2007, equal to the 16% reported for the full year 2007. No other customer accounted for more than 10% of total net revenues inthe fourth quarter or full year 2007.

All remaining commentary in this script regarding income, statements, margins, costs, and absolute profits were referred to non-GAAP results, which was defined earlier in this conference call.

Gross profit margins were a more typical 73% of revenues inthe fourth quarter 2007 compared with 70.5% reported inthe third quarter. You’ll recall that last quarter we had reported that we recorded a reserve for excess inventory for selected products.

Research and development expenses inthe third quarter were $9 million, or 22% of revenues, compared with $8.1 million, or 22% of revenues, in the third quarter. The increase was primarily the result of higher product developments costs, including prototype and beta unit costs incurred in the fourth quarter in association with our new product programs.

Sales and marketing expenses inthe fourth quarter were $16.5 million, or 40% of revenues, compared with $14.5 million, or 40% of revenues, in the third quarter. Sales and marketing expenses increased primarily as a result of increased compensation expense related to higher revenues, incremental incentives programs, and increased marketing programs.

General and administrative expenses inthe fourth quarter were $3.9 million, or 10% of revenues, compared with 3.2%, or 9% of revenues, inthe third quarter. The increase in expenses primarily reflects an increase in the provision for bad debts in addition to increases in IT-related spending.

We’re very pleased to report an operating income of $521,000 inthe fourth quarter compared to an operating loss for the third quarter of $240,000. While we have not yet achieved a return to our target operating model with respect to profitability, we are highly focused on continued improvements in that regard during 2008, with a combined focus on expense controls balanced with re-ignition of significant revenue growth.

We’re also pleased to report net income of $309,000, or $0.01 per diluted share, for the fourth quarter of 2007. Net income inthe fourth quarter includes an additional tax provision of approximately $650,000 primarily to a reduced full year tax benefit as a result of the better than expected fourth quarter pre-tax income. This compares with net income of $682,000, or $0.02 per diluted share, for the third quarter.

Total headcount was 428 at December 31 compared with approximately 456 at quarter-end for the first three quarters of 2007, reflecting primarily a planned reduction executed near the end of this quarter. The reduction was completed to align our resources more closely with our strategic objectives. Our plans anticipate headcount of between 440 and 460 during 2008.

Total cash comprised of cash, cash equivalents, and investments was $77.8 million at December 31, roughly equivalent to the balances of $76.6 million atDecember 31, 2006. Trade receivables of $27.4 million atDecember 31, 2007 resulted in approximately 62 days sales outstanding, which is just slightly higher than our target range of 55 to 60 days, compared to $21.8 million or 55 days reported atSeptember 30, 2007.

Our reported inventories, which are primarily comprised of finished goods, were $7.7 million at December 31, reflecting our planned reductions compared to $8.5 million atSeptember 30, 2007 and $9.2 million at June 30, 2007.

Finally, although we’ve been able to report higher revenues and substantially improved operating margins inthe third and again inthe fourth quarters, we do not plan to provide additional guidance at this time. Even considering the possibility of a seasonally weaker first quarter, particularly in light of the weak economic conditions inthe US, our outlook for 2008 is extremely positive.

Based on our new products and strong product pipeline, impressive new leadership in sales, marketing and product management, new and improved competitive messaging that will benefit our sales force and channel partners, and carefully controlling lower priority costs, we look forward to delivering significantly higher revenues in 2008 and a much improved picture of profitability.

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

Dave Cote

Thank you, David. Good afternoon to all of you. I’d like to begin with some brief remarks about Packeteer’s performance and execution in Q4 and to put the full year in context.

Q4 ‘07 was the second best quarter for revenue inthe company’s history, at $40.9 million. On the basis of this performance, we were able to drive apro forma net profit of $300,000, or $0.01 per diluted share, for the fourth quarter. You’ll recall that this was our second consecutive quarter of improving performance. As we reported last quarter, Packeteer’s Q3 performance was the best revenue Q3 quarter in the history of the company, at $36.4 million.

In summary, we rebounded from a disappointing start in 2007 to achieve two sequential quarters of profitability and increasing revenue. So what was behind the turnaround for Packeteer? First of all, in 2007, Packeteer made significant changes to our leadership team. We added seasoned leadership inkey areas that benefited an already strong leadership team to help Packeteer compete in new ways.

Ray Smets joined our organization from Motorola to lead a newly created executive role, heading up a combined sales and marketing organization. Our goal was to improve alignment and execution between our two outbound organizations and to bring fresh, new ideas to improving sales execution. Based on the feedback from our recent sales kickoff meeting, I believe we have improved momentum and commitment from our sales team.

Dave Winikoff joined us in Q3 from Siemens to lead our product management organization. And our VP-Engineering, Nelu Mihai, having joined us approximately one year earlier, was aggressively beginning to turn out new products and managing a strong future product roadmap.

Our goal with this strengthened executive team was to engage in a new strategic direction, while executing on an aggressive innovation plan to expand on our position of strength inthe WAN optimization and visibility market. While these executives made a tangible difference to our business in 2007, 2008 will be the first year that we will receive the full benefit of their leadership and drive.

From a product perspective, Packeteer refocused around our core PacketShaper product, even while we accelerated the sales of our iShared and iShaper products. We grew the percentage of our revenues from acceleration products to 45% of product revenues, which translates on an absolute basis to 30% growth over acceleration product revenue in Q3 of 2007.

I attribute this both to growing market demand for our solutions and qualitatively stronger product releases. Our belief was and continues to be that iShaper sales, in particular, would represent larger transactions and that they would drag incremental sales of PacketShaper, iShared and other products. Inthe fourth quarter, this strategy began to pay dividends, as our iShaper and iShared sales grew significantly in addition to our traditional PacketShaper products.

Finally, the second half of 2007 represented a return to our core strengths and increased management attention to executing the fundamentals. We enhanced our investment in lead generation programs. We instituted a channel incentive program to increase inventory turns, and we implemented a sales incentive program to accelerate the timing of Q4 deals.

The net results were higher revenues and substantially improved operating results inthe fourth quarter and improved momentum moving into the new fiscal year. No doubt, we have much more to prove, but I’m confident we’re on the right track.

Looking ahead, we plan to grow 2008 revenue significantly and improve profitability ata faster pace. To accomplish these objectives, we have unified the company behind a vision that leverages both market momentum and our core strengths to elevate Packeteer as a strategic partner to our customers.

Intelligence Service Assurance is our vision of what customers really want from their IT infrastructure. We’ve evolved from a world where infrastructure was deployed and delivered specific monolithic pieces of functionality. Routers routed, servers served, switches switched.

Today’s requirements have become much more about handling data flows. There was a need to be much more application aware. The requirement is to be able to treat applications differently based on business priorities and apply specific techniques to optimize theflow of application data from place to place. Packeteer uniquely delivers on these application-centered requirements.

In tomorrow’s world, we believe that an application-centric view will give way to a service-focused view. Ultimately, it’s services that businesses deliver; it’s services that customers pay for. A service is a combination of applications, protocols, and infrastructure that deliver an end result.

In a simple example, a customer service representative speaking with a customer might need to use three separate applications to successfully deliver the service of support to the customer. They would use voiceover-IP to speak with the customer, a CRM application to access the customer’s account information, and a knowledge database application to find a few options for solving the customer’s problem. All three applications must work well for the call to be handled successfully.

Optimizing one instead of or atthe expense of the others does nothing to ultimately enhance the business result and, therefore, has limited value. It does no good to have fast access to a CRM application if the voiceover-IP call quality is so poor that the connection with the customer is lost.

Our core competency is network traffic processing, especially classification, monitoring, QOS and optimization. It is the cornerstone of granular real-time management of how applications run. We already look across every application and tie together applications and network resources, and our vision is to build upon our existing capabilities to become the end-to-end service delivery platform.

Our ability to execute on this vision rests upon three core strengths, product innovation, our large installed customer base, and a broad and deep channel ecosystem. 2008 will bethe year we aggressively return to our core strength of product innovation. As discussed earlier, we have attracted new leadership for both the R&D and product management functions, and they are now beginning to deliver on the pipeline of innovation they initiated upon their arrival.

Packeteer has three new products, among many more to come, that support our vision atthe core, atthe edge, and a central management component that ties itall together. IntelligenceCenter, announced in December of Q4, is the central management platform that aggregates, analyzes, and takes action to enforce end-to-end application and service performance and reports on these actions at all levels.

In thecore the Talon TC30 appliance, announced a week or so ago on January 21, sits at our customer’s biggest, most critical juncture, where the broadest range of applications flow, and provides early detection and control over performance to protect sites that are further downstream.

The third proof point is the next generation of Mobiliti. It delivers performance atthe edge as a SoftWOC, or soft WAN optimization controller, by intelligently caching content and accelerating data even across VPN connections. These three products leverage Packeteer’s true high-definition application visibility and unique analysis and optimization technologies to allow organizations to define, manage and optimize the services that their businesses rely on.

The second key to executing our strategy is the trust we have established across a very broad customer base. Packeteer has thousands of customers, centered inall major geographies and industry verticals.

These customers are not looking to add to their list of IT vendors. And in fact, they want to trim their portfolio of vendors and develop more strategic relationships with vendors that have proven their ability to deliver value over time. We have tremendous longevity with our customer base, and they have been instrumental in the creation of our vision.

This year, we will segment our customer base and take a programmatic approach to developing our customers, investing in several programs to increase customer satisfaction, improve customer communication, and upgrade them to our next generation of products.

The final core competence that we will leverage is our extensive channel distribution network. We have over 1,400 partners that provide us true global reach. Our channel is a strategic differentiator for Packeteer, and we are committed to investing in infrastructure and programs that will continue to scale and increase the profitability of our channel.

We’ve targeted two areas for investment in 2008. The first is an improved partner relationship management infrastructure to scale the way we enable our channel training and channel communications. And the second is a systematic program to introduce quarterly solutions marketing campaigns that our channel can leverage to target their installed base of customers as well as new prospects.

As I look across our business, I seean organization well positioned to achieve our growth and profitability targets for 2008. The company is unified behind a strategic vision that positions us as leaders ina rapidly growing market space and leverages our core competencies. The product pipeline is full, and we can leverage a rich partner ecosystem to reach an extensive base of satisfied customers.

There are, however, additional business drivers to consider. This is a high growth competitive market. Forecasts from both Gartner and IDC predict significant growth in 2008, between 30 and 40%. But there area number of competitors, both new companies and established ones, aimed atthe acceleration part of the market.

While we are focused on these opportunities, we are also driven by major IT trends where Packeteer’s value is critical to our customers’ success, ERP rollouts, voiceover-IP implementations, increasing video over-IP, server consolidation, and the overall move to MPLS.

We believe our differentiation in visibility and control technologies and in Microsoft branch services will complement our strength in other optimization technologies to deliver a complete solution for all applications across our customers’ networks.

The problem we solve is real. Aberdeen Group recently sited a network architect of a large financial services company saying, “Once you combine voice, video, and data on the same network, the bandwidth consumption will explode. You need to have the right set of tools to ensure that your network will be able to handle that.” It’s from an Aberdeen Group report in October 2007. This is where Packeteer uniquely shines.

Our business is well positioned to avoid weakness that may hit any particular geography or industry sector, such as financial services, because our solutions help companies to get more out of their existing IT investments. Evidence of this was our 20% plus annual growth inthe years 2001 to 2003, which was arguably one of the worst downturns in IT spending.

We will continue to benefit from the leadership changes we made last year, and we continue to add additional leadership talent to the organization. Already early in 2008, we have added a new Vice President of Marketing and a new Director of Sales Operations to deepen our sales and marketing organization.

Finally, execution is thekey for 2008. We have rebounded from a difficult start in 2007, and we are back on the attack with a clear plan to grow revenues in 2008 and increase profitability.

I’ll turn the call back to David now for questions.

David C. Yntema

This concludes Packeteer’s financial and business presentation and the call will now be open for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Erik Suppiger - Signal Hill.

Erik Suppiger - Signal Hill

So, if the acceleration market is growing 30-40% as some of the pundits are suggesting, can you comment on how your growth might relate to that?

Dave Cote

Well, we’re not really providing any guidance at this point. So, I mean, we’ve tried to give you a flavor for how we think 2008 represent a great opportunity for us, but we’re not giving specific guidance.

Erik Suppiger - Signal Hill

Would you expect to gain share? Can you say or hold share? Can you discuss it from that perspective?

Dave Cote

I don’t think so.

Erik Suppiger - Signal Hill

Can you talk a little bit about the competition? It sounds like you guys are really making some progress with the iShaper and kind of the go-to-market strategy here. Have you had some wins against the likes of Riverbed and some of the other players at this point?

Dave Cote

Yes. What we said on the last call, the thing that we began to focus on inthe third quarter, and obviously continued aggressively inthe fourth quarter is when our customers see value in the more complete solution we offer.

In other words, when they value the visibility we provide, when they value and require an ability to manage transaction based applications, voice, video, as well as bulk file applications, and when they need Microsoft branch services. Those are places where we have a very unique offering and our winrate is very high in those situations.

So in those, we certainly have beat the likes of Riverbed and Cisco and others. When we’re dealing with pure acceleration and that’s allthe customer wants, it’s a tougher win, and I don’t think the winrate is not that high. It is getting better because our acceleration products are better.

But really where we’re aiming people is, as I mentioned in my remarks, into these big trends, where acceleration is important, but so also is voice and video and transaction based applications. That’s really where our technology shines.

Erik Suppiger - Signal Hill

So from the recovery and the turnaround you’ve talked about, it sounds like you are seeing more of those opportunities where there is really more of a focus on the acceleration in addition to the management.

Dave Cote

Yes. I mean I think that acceleration came on the market really a year ago, well maybe close to two years ago, ina bigger way. And I think it, like compression three, four years before that, was ahot technology that very much solved some specific pain points for people and continues to do that.

But I think that what’s occurring is voice is becoming more important on people’s networks. The need to really understand how the applications run, and not only provide acceleration for some of the applications, but quality of service for others is again something that is becoming more important certainly to our customers.

I’d also say that some of the renewed marketing programs and demand creation to target those opportunities have allowed us to cultivate more of those opportunities and that’s again a focus for us in ‘08.

Erik Suppiger - Signal Hill

And then Dave Yntema that is. Just to be clear, the taxes for this quarter, it looks like on a normalized basis you would have achieved about $0.03 per share. What tax rate should we use going forward or first off, is it correct to assume that it would have been more like $0.03? And secondly, can you comment on the taxes for next year, tax rate?

David C. Yntema

Yes, I certainly will do that. Your assumption is correct. I mean that’s sort of the delta. I mean, in a sense, its good news. Obviously, we had to provide a provision because our profitability was higher, and therefore, we reduced the benefit for the full year because of losses.

As you think about next year, and this is not dissimilar from what we’ve talked about previously. We think that the tax rate for next year is in the 20-ish percent range. That is similar to the range long-term for Packeteer, as well, years out, and not much higher than that. The highest it would ever be, from our perspective, is 25%, but 20% is probably reasonable for the next couple of years to think in those terms.

Erik Suppiger - Signal Hill

DSOs were, I think, slightly above target. What was the linearity like, or what was the reason for that?

David C. Yntema

So the linearity was very similar for the last three quarters, frankly. We had roughly just a little bit under 50% of the revenue in the third month for each of the last three quarters. But then, even within that, the timing within a given month dictates what your receivable balances are going to be. So as long as we’re relatively close to the range, this is reasonable for us.

Operator

Our next question comes from Christian Schwab - Craig-Hallum.

Christian Schwab - Craig-Hallum

What was the acceleration product revenue inthe quarter?

David C. Yntema

It was about 45% of product revenue. I don’t have the number offhand, but I think that’s inthe numbers.

Christian Schwab - Craig-Hallum

And then, what does the word significant mean to you?

David C. Yntema

Sorry, Christian, that’s a bad path to go down. It’s meant to emphasize our enthusiasm about the opportunity for the quarter. It means something obviously to us. We’re trying to send a message here. This is an important revenue growth year for us, but we’re not giving guidance other than that. We did want to give you a bit of flavor.

Christian Schwab - Craig-Hallum

And a little bit more color on that flavor, should we assume a return to like the historical growth rate of the company? Is that fair?

David C. Yntema

No, can’t go there with you. We’re just not going to go there.

Christian Schwab - Craig-Hallum

In quarterly expenses should we expect pretty modest sequential growth? Is that what you mean by expense control? Or do you mean that operating expenses, and I’m talking about total dollars spent not percentage of revenue, should be relatively flat throughout 2008, or will they go up modestly with this significant revenue growth?

David C. Yntema

Well, they fluctuate and so forth. So you’ll have to factor that in. A couple of points that I did make were around headcount, for example, our anticipated headcount ranging from 440 to 460 will give you some sense. That’s over the entire year and similarly, our commitment to continue to drive higher levels of profitability. And generally, when we speak of that, as you recall, our focus is on operating income and getting back closer to our targeted operating income goals.

Dave Cote

One of the other things that we said on the last conference call and with respect to this is that we are closely monitoring expenses in things that are not critical to either market demand creation or product programs that we think are critical to this pipeline of products we’ve got. And that’s still a guiding principal for us.

So while we are obviously driving to increase revenue and improve profitability, there are still areas where we’re going to spend, where we think inthe mid to long-term it represents revenue growth opportunities. And so it’s that balance that we are looking for.

Christian Schwab - Craig-Hallum

What was the average transaction size inthe quarter?

Dave Cote

Well, the thing that we talked about inthe past, and I certainly can give you the statistics; we talked about 100K plus deals. There were about 50 inthe quarter which was up from 45 inthe third quarter. So improvement in the number of deals, and actually the average deal size increased fairly substantially. I think it was in the kind of mid-180s. And it ended up in Q4 more like mid-200s, like 250, something like that. Soa nice increase in transaction size and number.

That does, just to put the caveat that does fluctuate sometimes from quarter-to-quarter. But we were pleased with not only the deals in the quarter, I made a comment about iShaper driving larger transactions, but also the pipeline that’s developing in terms of iShaper and other products as well tend to be headed towards larger transactions.

Christian Schwab - Craig-Hallum

And help me out on that. Is that just due to the people buying more equipment at once?

Dave Cote

Well, it’s more driven by the actual solution. iShaper is squarely aimed at people doing server consolidation, and in companies doing server consolidation, it’s about removing the servers and the branches and replacing them with an iShaper.

And soit tends to bea deployment inall of the branches of a company rather than maybe some of the early parts of a PacketShaper deployment, where they put itin thecore ina few key sites. So if you’re looking at doing server consolidation it’s about putting one of our appliances at every branch, and so that tends to drive larger transactions.

Christian Schwab - Craig-Hallum

Can you remind us what the target model is that you are striving for?

David C. Yntema

Yes. Well, the principle focus of the company obviously is to scale as rapidly as possible by driving revenue. And in that regard, we attempt to deliver reasonable level of profitability. So our goal for operating income is 16-18%. We assume, to get there, when we are at our targets, we will be roughly 72% on the gross margin line, 18% on R&D, 30-32% on sales and marketing and 6-7% on G&A.

Operator

Our next question comes from Manny Recarey - Kaufman Brothers.

Manny Recarey - Kaufman Brothers

I know you guys aren’t giving guidance. I just wanted to make sure I heard you correctly in that building out our models, looking atthe first quarter, at not necessarily look atthe 12% sequential increase that there could be some typical seasonality inthe first quarter. Is that correct?

David C. Yntema

We typically see that. And oftentimes just in business in general a better restriction as people are wrapping up their budgets for the next year. And you couple that with sort of the softness in the economy today and some resistance to spending, it’s entirely possible.

I mean we are not seeing anything specific in Packeteer that would suggest to us that that’s an issue. But historically for us, ithas been a more difficult quarter than others. And in today’s economic climate, I think there is allthe more reason to think about it.

Manny Recarey - Kaufman Brothers

One, can you just give a little bit more color on theAmericas? That was quite strong sequentially, was there anything specific driving that, or just better execution?

Dave Cote

I don’t think there was anything in particular, other than I think theAmericas, probably more than any other geography, sees a strong close to their kind of calendar fiscal year. But I wouldn’t read a lot into it. I mean we have fluctuation from quarter-to-quarter. And David made the comment that I think it was 43%, actually slightly under the 45% for the entire year. So again, I wouldn’t read a whole lot into that.

David C. Yntema

Yes. I think historically, Manny, if you go back and look atthe Americas and stuff over the last few years, actually, ithas arranged anywhere from 43-47% on an annual basis, and there are fluctuations on a quarterly basis. It just kind of depends.

Manny Recarey - Kaufman Brothers

Juniper and Cisco made some comments on new products announcements in the past week or so within this area. Would you like to comment on that and kind of how you guys stack-up and see them as the competition? I see Juniper, seems like they are putting a bit much bigger push onto the enterprise side.

Dave Cote

Yes, sure. I think in both cases if you look at it, the products announced were really inthe acceleration space. And in many respects, certainly for Cisco, that’s a catch up game and we’ll seethe degree to which their products really can begin to compete more effectively with ours and others. In the case of Juniper, that’s kind of been the product heritage there is acceleration.

And as we have tried to indicate, we think the opportunity for Packeteer certainly, and we think the market opportunity is much broader than that. Our visibility, our QOS, some of our other technologies and certainly in branch consolidation the Microsoft services represent unique advantages for us. I don’t know that itchanges things for us, anymore.

And we take both those companies seriously, given the size of them. I frankly think it’s probably a bigger issue for Riverbed, as they are kind of the more narrowly focused on the acceleration space and that’s clearly where these products are focused.

Operator

Our next question comes from Steven Freitas - BMO Capital Markets.

Steven Freitas - BMO Capital Markets

As we close 2008, a year from now and Packeteer grows well, but slower than the market as a whole, would that be acceptable to management?

David C. Yntema

No, that’s sort of suggesting are we going to be lower than 30%. No Steve, we are just not going to go there on guidance. I’ll come back to the response that I gave to Manny earlier. The principle goal here of the company is to drive revenue as rapidly as possible. We think we have a broad range of products that are going to compete very effectively in this market, and I’m afraid you guys will just have to check us out for a few quarters.

Dave Cote

Yes, I guess for one other thing I’d say, we certainly have set a business plan that we think is aggressive and atthe same time prudent. But obviously, our goals are to grow our share, increase our revenue, etc. And as we embark on this new year, we are very encouraged by what we’ve seen leading into the year and the new product pipeline that we have ahead of us. But, we’ve got to go out and execute on that.

Steven Freitas - BMO Capital Markets

I guess you had mentioned earlier the acceleration market. And so you seem to have some differentiation or differentiate that from the market you addressed. As you understand it, can you give us a sense as to what you think is a larger market? Acceleration or what the alternative is?

Dave Cote

Yes, I guess, I don’t seeit as two different markets. What I see it as is that, we appeal to, you could argue a different, I would argue a broader set of issues. If you look at what acceleration is about, it is primarily about bulk file, acceleration, and caching.

And while that’s a significant part of the marketplace, it does nothing to address voice, which is becoming a bigger and bigger issue on IP networks. Video, which is really just beginning and video represents a tremendous challenge for our customers, and therefore an opportunity in that video teleconferencing is mission critical; YouTube is not.

And differentiating and managing that when it’s large amounts of bandwidth is abig deal. That’s a coming problem. Rolling out an ERP application, that’s square in our wheelhouse, and frankly transaction-based applications benefit zero from caching and zero from acceleration.

So it’s not so much that I think it’s a different market as much as I think we serve a broader market, and what we did inthe second half of the year was really return to those roots for us.

And while I believe our compression and acceleration and caching technology is as good or better than the competition, it’s when you add the unique abilities in our visibility, our QOS, that help to enable these other applications where we just flat out win. And we just got to concentrate more on that. So again, I don’t think it’s a separate market. I think they are absolutely related and this is going to help us win with differentiation.

Steven Freitas - BMO Capital Markets

So do you think the legacy PacketShaper business, there is a vibrant standalone business there or do you think that ultimately that gets subsumed as a feature in anall encompassing WAN optimization solution?

Dave Cote

Well, I mean I guess first of all, I hesitate and find ita little troubling you call the PacketShaper “legacy,” because we continue to improve that product on an ongoing basis. But probably more importantly, we deliver a solution today in the iShaper, which embodies everything the PacketShaper is plus these technologies that enable acceleration and Microsoft branch services. So we have that solution today. And there area number of customers for which that is a great opportunity.

But I would also say there are customers that are continuing to buy PacketShapers and standalone iShare because of the way they manage their networks, the way they look at their business, etc. So to me, it is a collection of products and technologies to service the needs of our customers.

And we arein a position and in fact seeing increasing examples, where customers are putting an iShapers in their branches. They’re putting PacketShapers in certain other branches or at their core. And so it’s that flexibility to deliver a solution to meet the needs of our customers that is really driving us, and is why I don’t really consider it two separate markets.

Steven Freitas - BMO Capital Markets

And then just finally, are you adding resellers to augment your global reach?

Dave Cote

Very selectively, I mean, as I mention in my remarks, we have 1,400 resellers. We have a significant number of resellers. Having said that, we certainly are on a case-by-case geographic basis looking at addition, but I would say they are not wholesale additions we’re looking for.

As I mentioned, the investment is going to bein better training and communications infrastructure and in delivering marketing programs to them to help generate more business and profitability for them. But 1,400 is a pretty extensive reseller base. So developing that I think is the number one priority.

Operator

Out next question comes from Paul McWilliams - Indie Research.

Paul McWilliams - Indie Research

A few questions here, what department saw the largest cutbacks in late December?

David C. Yntema

Paul, I’m going to choose not to bring that up, quite frankly. I mean, we will publish inthe 10-K, more detailed headcounts for the end of the year and so forth. But it’s not public atthe moment and I’d rather leave the remarks where they are.

Paul McWilliams - Indie Research

How does the virtualization trend affect Packeteer?

Dave Cote

Well, I mean some ways it doesn’t, from the perspective that virtualization is really primarily inthe world of compute resources, and virtualized servers, etc. and for us then it looks like multiple servers that are instantiated on a single hardware platform as opposed to multiple servers. So, inthe work that our customers do, it in many respects doesn’t matter.

Having said that, I think that virtualization represents an opportunity for our unique classification capabilities to help in companies understanding how their virtualized systems are beginning to operate. And so that’s an area that we are exploring.

The second one would be, is there a way or might we use virtualization in our own platform technology to deliver functionality? And that’s something that is being explored from an R&D standpoint. And obviously, we don’t talk about new products, but that would be an area that potentially could impact how we deliver products.

So inthe mainstream of our business, it’s another way to look at technology. We think there is an opportunity for us to add value with our core classification, and it may be an area we utilize for technology that we deliver.

Paul McWilliams - Indie Research

Are you seeing any of the early adopters of acceleration come back and look for a more complete solution, i.e., have you seen Riverbed customers come to you, to look for improvements in QOS, improvements in application management?

Dave Cote

I have some anecdotal evidence of that. I wouldn’t say it’s a trend yet. But I am convinced that acceleration is not sufficient. If you arein an architectural firm and 90% of your traffic across your network is CAD files, then acceleration may be enough.

But if you are any sort of multi-national, anybody that’s got the kinds of application mixes we seein many of our enterprises from chemical and manufacturing companies to financial services, to hospitality, etc., they’ll be back. So I think that it’s a matter of time, but I can’t say there’s a trend yet.

Paul McWilliams - Indie Research

What did you change then in your demand generation strategy and tactics that has led to this improvement?

Dave Cote

Well, I think if I oversimplify the first half of the year, everything looked like acceleration. I mean, I think the market was completely enamored with it. At that time there were, I don’t know, nine or 10 companies touting that they have the solution, and we all probably got caught up in that.

And atthe same time, to deliver our vision, to deliver the complete solution we offer required two boxes. And with the introduction of the iShaper and kind of refocusing on, as I’ve said, opportunities where acceleration plus the need for managing transactions or managing voice, etc., focusing on those opportunities represent a much higher win rate for us. And we really began that, with the iShaper launch and with the work that we started inthe third quarter and that has continued.

Paul McWilliams - Indie Research

About how long does it take for your sales guy to do a basic demo?

Dave Cote

Well, it sort of depends. I mean, if you are doing a demo of visibility, it takes him 15 minutes to set up and he comes back anywhere from a day to a week later to take a look at what’s going on. To demonstrate acceleration, it might take him, I don’t know, maybe half an hour, an hour.

Paul McWilliams - Indie Research

Did you seea pick up in demand generated by the Microsoft partnership during the quarter?

David C. Yntema

Not directly from the Microsoft partnership per se. We certainly saw iShaper and the demand for Microsoft services through those resellers improve. But I don’t think there was anything specific from a market demand creation come directly out of Microsoft last quarter.

I was just going to say that, I think in third quarter we did some actual seminars in various areas of Microsoft. And I don’t recall we had specific demand generation programs driving with Microsoft.

Paul McWilliams - Indie Research

What percentage of business came from new customers?

David C. Yntema

I think its probably we’ve been sitting in this sort of 55-60% installed customers. So I think that, I haven’t seen anything that changed that and as I look across the, the customer set. So, what’s that, maybe 40%, 45% new?

Paul McWilliams - Indie Research

Arethe core units and core dollars also consistent with past quarters?

David C. Yntema

Yes. In revenue 60/40 core to edge, in units 70/30 edge to core.

Paul McWilliams - Indie Research

On the operating model, the 7218 etc. model, do you think that you might realize that by the quarter late this year?

David C. Yntema

I’m just not going to go there. We are certainly driven to get back to our profitability model. And, but we seea tremendous opportunity this next year, again, I just come back to our primary focus is growing the top line. We are going to focus on profitability as well I can assure you.

Operator

Our next question comes from Rohit Chopra - Wedbush Morgan.

Rohit Chopra - Wedbush Morgan

I had four questions for you. First one, last time I think I asked you about any verticals which showed some weakness, you mentioned Federal. Can you talk about anything that was different this quarter, better or worse? Any vertical compared to last quarter?

David C. Yntema

No. I don’t think so. I mean, again, if I look across primarily the larger opportunities, nothing jumps out of me either way, so, no, nothing really there.

Rohit Chopra - Wedbush Morgan

And then also last quarter you mentioned that the competitive environment was heating up. You said that the sales cycle had increased 30 to 60 days. Where are we now as you look at that? Is it still the same? Is it more? Is it going to get worse?

Dave Cote

So I guess I don’t recall that exact comment. But I guess I would say, I don’t think things have changed. Bigger deals take longer. I don’t think anything’s really changed there, certainly not for the worse at this point and there is a lot of noise out in the marketplace about IT spending etc. And we haven’t seen that yet, not to say that there isn’t something going on.

But we have not seen that yet, and therefore have not seen any sort of lengthening in sales cycles, etc. I think last year, certainly inthe first part of the year, there was a lot of confusion. And I think that extended sales cycles. And I think that has calmed down to some degree. And we arein a fairly typical environment, from all I can tell.

Rohit Chopra - Wedbush Morgan

And then you also mentioned this quarter that there were some incentive programs that you were starting or you started? Which one is that? Did you actually start those incentive programs? I think it was sales incentive and channel incentive programs. Is that to begin or did that start late last year?

Dave Cote

So yes, of course, we certainly kicked into some incentive programs last year as we were starting to turn the business around. You can expect there will be more this next year as well. Yes, I think that I would attribute some of this to our new leadership in Ray and our new VP of Marketing.

I think we’re going to see more aggressive marketing programs that run the gamut from awareness to demand creation to incentives. So, I think it’s just about a much more aggressive program at all levels to get after the business. So as David said, you’re going to see more of it.

Operator

Our next question comes from Doug Ireland - JMP Securities.

Doug Ireland - JMP Securities

I have just two questions. One is about your CapEx for the quarter.

David C. Yntema

Oh, boy. It’s relatively modest. Go on to your second one while I see if I can find it quickly for you in just a moment.

Doug Ireland - JMP Securities

And the second one was about your international mix. As we look atan uncertain economy inthe United States, I’m wondering what your mix looks like in terms of domestic versus foreign revenue.

Dave Cote

Well, I guess we have not seen any indication of uncertainty in theUS. So I think that right now, we’re operating on what has been, I think David mentioned earlier that America is between 43% and 47% of revenue, has kind of been the range for probably the last four or five years.

We have no indication that things are going to be different from that. They do fluctuate from quarter-to-quarter, given various seasonality or deals, etc. But there is nothing in our planning or what we’re hearing and getting back from our sales force that would indicate any difference there.

David C. Yntema

Back to your first question, I actually didn’t bring that detailed stuff in, but I’m guessing, it’s somewhere between $1 and $2 million. The CapEx is never particularly large for us. So sorry about that, or you can check back with me later. Obviously, it will be inthe K, which will be out in a couple weeks as well.

Operator

Our next question comes from Cameron Cooke - Janco Partners.

Cameron Cooke - Janco Partners

I was wondering if you could comment on sales force productivity and/or how longit takes to ramp-up a new sales person.

Dave Cote

Sure, with respect to ramping sales people, it sort of depends. If they are coming into an existing territory and we’re adding a resource, it’s I’d sayat six months is sort of the typical. If it’s a brand new territory, literally, where we’ve never had resource before, opening a new country or something like that, it’s probably more like 9 to 12 months to see that ramp.

Sales force productivity, I don’t have an exact metric there. But one thing I would say about our sales force year-on-year, we come into 2008 with a sales force that has largely been in place for the bulk of the year.

And so one of the other things that, obviously we think is important and how we deliver on the 2008 plan is the productivity of the sales force. And I think that we feel pretty comfortable that we’re walking into a year with a sales force that is, relatively speaking, staffed, trained, and ready to go.

Cameron Cooke - Janco Partners

And any particular skew going forward on the headcount increase, since you’ve passed on the headcount reduction question?

David C. Yntema

Well, and I’m going to pass on that one as well. All I can lead you to on that, and again is we mentioned that we made some reductions in the company to more closely fit with our strategies going forward into next year. You can assume that, obviously with one of the goals, meaning to drive the top line as rapidly as we can, a good portion of those are likely to be inthe sales organization, but I’d rather not give any more information than that.

Operator

Our next question comes from Bill Choi - Jefferies.

[Manjal] - Jefferies

This is [Manjal] for Bill Choi. A couple of questions, one was on the new TC30 product. Do you plan to position that inthe service provider market, or do you think that will still be large enterprises?

Dave Cote

I think ithas an applicability in the service provider space. I think that it’s one of those things we will see as we roll it out, how applicable it is. It’s also a platform that obviously is delivered. I mean the hardware platform delivers the software load. And so as we look at are there ways to enhance that that may bean area that we focus on.

The other kind of bridging area is universities. I mean universities sometimes act like ISPs and sometimes act like enterprises. And so, I think it absolutely has applicability in that space which is a strength for Packeteer. So I think we’ll certainly look at expanding this into the service provider space.

I said I think in prior conversations, we have the world’s kind of best de-packet inspection on the planet. So applying that with very high performance, multi-gigabit performance on the talent, we think may have some interest inthe service provider space.

[Manjal] - Jefferies

So that’s maybe in the future. You are not talking to anyone right now, anything that you can comment around those lines?

Dave Cote

Nothing we can comment on right now.

[Manjal] - Jefferies

Can you give us any sense of the product roadmap, I mean, in terms of what to expect going forward and talk about lot of new products coming out?

Dave Cote

Well, I mean, we don’t really talked about unannounced products. I mean, I would tell you that Intelligent Center is a new platform represents, because it is a platform, an opportunity for continued enhancement in additional reports, additional modules to deliver on that platform, to take advantage of people’s installations.

We will continue to drive integration in costs on the edge, and scale and performance atthe core. So, those are evidenced in the products that we’ve delivered, but we certainly will continue on that path, and you’ll hear from us inthe coming quarters.

[Manjal] - Jefferies

Any deals over $1 million inthe quarter?

Dave Cote

Yes.

[Manjal] - Jefferies

Could you give us...?

Dave Cote

I mean we don’t really go into a lot of detail on the specific opportunities and sometimes we don’t, because the customer doesn’t let us.

[Manjal] - Jefferies

And just for a clarification. When you say acceleration products are 45%, is it fair to define acceleration products as iShaper plus iShared and the rest as PacketShaper?

Dave Cote

No. It’s iShared, iShaper, and the acceleration modules or Shapers with acceleration modules on them. So, it does include some of the PacketShaper products. And this gets back to a comment I made earlier that, I mean PacketShaper with acceleration and compression is oftentimes the exact solution the customer is looking for and they are coming in looking for an acceleration product.

So there are circumstances where that is the right solution. In addition, it is also the SkyX family of products, which have traditionally been inthe satellite space but we’ve also utilized that technologies in data center to data center replication. So, it’s really a collection of several products that meet a variety of needs in acceleration.

[Manjal] - Jefferies

And one question for David Yntema, in terms of the operating expenses, if you look across the line items, anything that was sort of one-time in nature in Q4 like IT spending or R&D prototypes that could change?

David C. Yntema

Well, the R&D prototype and beta units and so forth, depending on where we arein product programs, you could consider one-time. We don’t break those out, but we do have new product programs going forward as well. So, that causes R&D to fluctuate a good bit.

You would argue, for example, some of thechanges that we made in the headcount as well near the end of the quarter, probably had some one-time costs associated with them, but I guess that they’re not horribly dramatic, so I haven’t broken those out. But beyond that, I don’t know. No. Nothing else I’d like to comment on for you.

Operator

There are no further questions at this time, and we’ll turn the back to David.

David C. Yntema

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

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