Riverbed Technology, Inc. Q1 2008 Earnings Call Transcript

Riverbed Technology, Inc. (RVBD)

Q1 FY08 Earnings Call

April 24, 2008, 5:00 PM ET

Executives

Chris Danne - IR

Jerry M. Kennelly - Chairman, President and CEO

Randy S. Gottfried - CFO

Eric Wolford - Sr. VP of Marketing and Business Development

Greg Waybright - Interim VP, IR

Analysts

Cobb Sadler - Deutsche Bank

Jason Ader - Thomas Weisel

Ryan Hutchinson - Lazard

Andrew Nowinski - Piper Jaffray

Nigel Frankson - Citigroup

David Kozlowski - Signal Hill

Min Chou - Jefferies

Scott Zeller - Needham & Company

Saud Masud - UBS

Rohit Chopra - Wedbush Morgan

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Riverbed Technology first quarter 2008 results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. This conference call is being recorded today, Thursday, April 24, 2008.

I would now like to turn the conference over to Chris Danne, Investor Relations. Please go ahead, Sir.

Chris Danne - Investor Relations

Thank you, Mary. Good afternoon and thank you for joining us on today's conference call to discuss Riverbed's first quarter 2008 results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of Riverbed's website at riverbed.com for the next 30 days.

With me on today's call are Jerry Kennelly, Riverbed's President and Chief Executive Officer; Randy Gottfried, Chief Financial Officer; and Eric Wolford, Senior Vice President of Marketing and Business Development. After the market closed today, Riverbed issued a press release with the results for its first quarter ended March 31, 2008. If you would like a copy of the release, you can access it online at the company's website.

We would like to remind you that during the course of this conference call, Riverbed's management may make forward-looking statements including financial projections; statements as due to plans and objectives of management for future operations; statements as to management's beliefs regarding the potential size of the markets for their products; market growth characteristics; statements regarding the stock repurchase program; statements regarding the option exchange program; and statements as to the company's future economic performance, financial conditions or results of operations.

These forward-looking statements are not historical facts but rather are based on Riverbed's current expectations and beliefs, and are based on information currently available to us. Words such as may, will, expects, intends, plans, believes, targets, estimates and variations of these words or similar words are intended to identify forward-looking statements. By discussing our current perception of our market and making these forward-looking statements, we're not undertaking an obligation to provide updates in the future. Riverbed's actual results may differ materially from those projected in these forward-looking statements and no one should assume at a later date that these comments from today are still valid.

The risk factor section of our 10-K and subsequent reports filed with or furnished to the SEC disclose risks that could cause these forward-looking statements to be incorrect. Any future product, feature or related specification that may be referenced in today's call are for informational purposes only and are not commitments to deliver any technology or enhancements. Riverbed reserves the right to modify future product plans at any time.

Riverbed's management will also be discussing non-GAAP financial measures in today's call. Operating results for the first quarter of 2008 that exclude the impact of stock-based compensation, stock-based payroll expenses and related tax effects will be used. These non-GAAP financial measures are provided to facilitate meaningful year-over-year and quarter-over-quarter comparisons. Please see the exhibit to Riverbed's earnings press release issued earlier today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and an explanation of why these non-GAAP financial measures are useful and how they are used by management.

On this call, Riverbed will also give guidance for the second fiscal quarter of 2008 using non-GAAP financial measures. We've not reconciled the forward-looking non-GAAP guidance that we will discuss today to comparable GAAP guidance because we cannot readily estimate the impact of our future stock price on our future stock-based compensation expenses.

With that said, I would now like to turn the call over to Riverbed's Chairman, President and CEO, Jerry Kennelly.

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

Thank you, Chris. Good afternoon, and thank you for joining us on today's conference call to discuss our first quarter 2008 results. Revenues for Q1 were $73 million and non-GAAP EPS was $0.11 per share. While a slower spending environment impacted our results, our revenues did grow 71% on a year-over-year basis and we continue to see opportunities for growth in the marketplace.

Our Q1 results represented the first quarter that Riverbed didn't grow sequentially. We believe that our results are related to the macroeconomic conditions as well as a seasonally softer quarter. During Q1, we saw a decrease in the closed rates on larger sales while smaller sales seem to be approved and closed at a normal rate. Overall, deals are closing but we did see some customers delay in the final approval process or making smaller initial purchases. This is most notable for new customers as revenues from our existing installed base grew modestly from the prior quarter.

Even in this tougher environment, we see a number of reasons why we are confident that we can continue to grow our business. First, our pipeline of new opportunities is strong and continues to grow at a very fast rate. We believe that this interest in wide area data services has never been higher and this is reflected in the number of prospective business opportunities we're seeing. Second, our Q2 has typically been a seasonally stronger period. Third, we remain the recognized technology and market leader. Our competitors rarely beat us in head-to-head competitions.

Our release of RiOS 5.0 also strengthened our competitive position, accelerating exchange 2007 and popular web applications, enhancing our security features and introducing the Riverbed Services platform. We have made considerable progress on RSP since last quarter, having announced the upcoming availability of virtual ad services including media streaming, core network services and unified threat management. With tens of thousands of Riverbed Steelhead appliances now installed worldwide, technology partners have an opportunity to offer their products for virtual ad services to the largest WDS marketplace in the industry.

Fourth, we continue to have strong new customer growth even in the tougher environment. Our pace in new customer additions was robust in Q1. We added over 500 new customers. Demonstrating that interest in WAN acceleration remains strong. Though the size of the initial purchase orders from new customers was down from Q4, we see no reason to believe that the long-term potential value of our new customers has changed, which is encouraging for the future.

During the quarter, new customers included a large government organization in Canada, a national postal service in Europe; energy companies in the US and Europe, including one of the world's largest; a number of Fortune 500 manufacturers among others. Our new customer acquisition and strong competitive position have enabled us to build our installed base to over 4,000 customers which we believe is the largest for our industry and includes many of the world's leading companies across a broad range of industry verticals.

During the first quarter we had solid orders from our installed base as these customers continue to roll out our solutions. These factors give us confidence in our market position and continued prospects for growth. We believe in the fundamentals of our business and are optimistic about our long-term growth. On that note we believe the current share price does not reflect the Company's long-term growth prospects and, consequently, our Board has authorized to repurchase of up to $100 million of Riverbed shares. We plan to start those repurchases this quarter.

While we are optimistic about the long term, we believe it's prudent to be cautious and even conservative about short-term results. With this in mind, we are closely managing expenses and have moderated the pace of new hiring. Moving forward we will continue to invest to grow our business but remain committed to continuing to improve our financial results over time. On that note I would like to turn over the call to our CFO Randy Gottfried to go over the financials. Randy.

Randy S. Gottfried - Chief Financial Officer

Thanks Jerry. Before getting into the numbers you will notice we've changed the format and which represent our revenue and cost of revenue. Prior to Q1 we broke out our revenue into three categories, product, service and Routable. Routable revenue represented a small subset of our transactions, typically product and service that were combined for reporting purposes. In Q1 Routable was about 2% of revenue and we expect it to continue to decrease as a percent of our top line. Since we went public in September of 2006, Routable revenue has become sufficiently small and we don't need to break it out anymore.

We have adjusted our presentation to reclassify the Routable components into both product and service and will be moving to just two lines of revenue going forward which we believe is more comparable to our competitors. Now with the transition we have included historical quarterly revenue and cost of revenue in the format in our press release and on our website. We don't plan on reporting the old format after this quarter.

Since I know most people have their model set up with the three lines of revenue, my commentary today will refer to the old format. In the first quarter, total revenue increased 71% year-over-year and decreased 4% sequentially to $73 million in the first quarter. We don't have any 10% customers in Q1. Sales of Steelhead Mobile increased as a percentage of revenue and were flat in absolute dollars generating about $2 million of revenue in Q1. Product revenue from new customers represented 43% of the total in Q1, down from the 48% we achieved in Q4. Product revenue from new customers down from the immediately preceding quarter on absolute dollars but still represented the second highest quarterly revenue contribution in our history from new customers.

57% of our product revenue or $32 million came from existing customers. This compares to $31.9 million last quarter. About 89% of our revenue came from indirect channels in Q1 with the remaining 11% coming from direct sales. Approximately 55% of our revenue was generated in the US with the remaining 45% coming from outside the country. Europe was our strongest market while the US was weaker in Q1.

Services revenue grew 121% over the first quarter of 2007 as we continued to grow our installed base of customers with support contracts. Let me shift over to the cost side. One important note, when I talk about cost and expenses, I am talking about non-GAAP numbers that excludes stock-based compensation and stock-based payroll taxes. Product gross margins came in at 76% in Q1 down from 78% in Q4. This change was consistent with the guidance we gave in our Q4 call and is our second-highest product gross margin in Riverbed's history. If you recall our Q4 gross margin was abnormally high due to an unusual product mix in the quarter. Service gross margins came in at 67% in Q1, down from 69% in Q4.

The combination led to gross margins of 74% also within the expected range we discussed on last quarter's call. We took the feedback we received seriously after our last earnings call and we are especially careful with our hiring in Q1 which helped keep our expenses down relative to plan. Still, we added 98 employees in the quarter, a number which was well under our original plan and finished with 721 employees at the end of March. Along with adding fewer headcount than planned we also have some big variable expenses, like commissions and management bonuses that pay well when the company does well but also significantly drop if we underachieve.

Sales and marketing expenses decreased in absolute dollars and as a percentage of revenue to 35% in Q1. The decrease was due to the lower commissions, partially offset by increased headcount-driven costs, the increased R&D in absolute dollars and as a percentage of revenues to 15%.

G&A expenses also increased in absolute dollars this quarter an increase to about 10% of revenues. Expenses related to our IP litigation was a big component for the G&A increase in Q1 and reduced our EPS by about $0.01 per share. Overall, our operating margin was 14% this quarter, down from 19% in Q4. Our non-GAAP tax rate was 36% in Q1 which was below our 39% forecast, favorably impacting our non-GAAP EPS. In 2008 we are now assuming a 36% to 38% tax rate which also assumes the R&D tax credit does not get renewed.

In Q1 we posted a GAAP tax rate of 44%. Due to the complexity of GAAP tax accounting rules, the GAAPs tax rate may continue to be volatile. Q1 non-GAAP net income was $7.9 million or $0.11 per share and we generated $0.01 per share on a GAAP basis. We finished March with $269 million of cash, cash equivalents and short-term investments. Cash from operations was $22 million in Q1.

Moving down the balance sheet we ended the quarter with $42 million of accounts receivable which represents 52 day sales outstanding, down from 59 days at December 31st. Inventory totaled $11 million at March 31st up from December 31st. Much of our inventory is evaluation inventory in the field. At March 31st our inventory was higher, largely due to the revenue shortfall. Inventory may be a bit higher for the next couple of quarters due to some improvements we are making to our supply chain that, in the short term will increase our inventory but in longer term will allow more efficiency in our model.

Deferred revenue, current and long-term portions, increased 14% to $38 million at quarter end. Total equity was $273 million at March 31st. We currently have about 11 million employee stock options outstanding. While we are very sensitive to investor concerns about adjusting the price on stock options, we do think that options are an important incentive for our employees to help grow our company's value. Within the next couple of weeks, we plan to file documents with the SEC to allow existing employees to tender underwater stock options and reissue them at the market closing price on the first business day after the tender period closes, although for somewhat fewer shares. We expect the process to take about one month. To be clear no Section 16 officers or Board members will participate in this exchange.

Looking forward, here is some guidance as we go into the second quarter. Again the profit numbers I'm going to mention are non-GAAP which excludes stock-based compensation and stock-based payroll taxes. Stock-based compensation expenses includes expenses derived from the issuance of options and shares under our employee stock purchase plan. We exclude these items from our guidance as we don't use them for our internal operational decisions and also because it requires estimates of our future stock price which is obviously unknown and a big driver for those calculations. Currently, we are cautiously optimistic entering the seasonally stronger second quarter.

Our pipeline is at record levels. At the same time, we are also cautious given our recent results in the macroeconomic environment. Balancing these factors, we are targeting revenues to be in the range of $76 million to $78 million and non-GAAP EPS up $0.11 to $0.12 per share for the quarter. This projection incorporates approximately $1 million in expenses related to our IP litigation. We are assuming fully diluted share account of 73.5 million shares.

Looking further out, we are updating our full year guidance to reflect the conditions we mentioned on this call and are currently expecting revenues in the range of $315 million to $330 million and non-GAAP earnings per share of $0.46 to $0.51. With that, let me turn it back over to Jerry.

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

Thank you, Randy. To summarize we are encouraged by closer examination of our first quarter results. We continue to add new customers at a strong clip. Initial purchase orders sizes were down but the long-term value of these customers remains unchanged. Our new customers add to what we believe is the largest WDS customer-installed base globally, which we believe will continue to help fuel our growth. Gross margins were the second highest in the company's history and our competitive position remains strong.

We generated over $22 million in cash flow from operations in the quarter, and ended the period with cash and equivalent of over $269 million and we have no debt. This was the seventh quarter in a row with positive cash flow. While we remain cautious in the current environment we also remained very excited about the long-term future of the country. With that said Eric Wolford, Randy and I would now be happy to answer any questions that you may have. Operator, you can now open it up for questions.

Question and Answer

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Cobb Sadler with Deutsche Bank. Please go ahead.

Cobb Sadler - Deutsche Bank

Thanks a lot and just on the stock option re-pricing, it is probably tough not to swallow now, but a good idea. But let me ask you this. Do you have any idea of how dilutive it might be or are you just going to wait and see how many you give out?

Randy S. Gottfried - Chief Financial Officer

I think, in general, there will be more details on the specifics of the plan maybe illustrative as I mentioned we do plan out giving -- the exchange will involve slightly fewer shares the original shares that are being exchanged.

Cobb Sadler - Deutsche Bank

Okay.

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

The exchange is implicit in our guidance for share account. But we'll make an SEC posting right after this call, Cobb. And the SEC requires that you go to that to get the details, but I think you'll find it a good plan.

Cobb Sadler - Deutsche Bank

Sounds good. And then, the mobile Steelhead product, you initially guided I think it was 8% to 10% of revenue acting in '08. You've changed overall guidance now so, should that still be the same ratio 8 to 10? Or does it go down a little bit and that's part of your reduced guidance?

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

Yeah, it did edge up this quarter as a percent of revenue from last quarter just slightly but we can't really speak to the 8% to 10% any more by the fourth quarter. Given those environment, I think we're going to take a new fresh look at that and probably come up with a new number.

Cobb Sadler - Deutsche Bank

Yeah, sounds good. And then last question on your storage-based product, have you baked much of that infer for, I guess Q4 probably, not much in Q3 but are you holding out for a decent amount in Q4 or are you just kind of -- if that project accelerates faster than we think it would, would that be upside I guess is a better way to ask it? That's all.

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

We've always described that as a 2009 product. So that in Q4 that will still be in beta [ph]. And that's always been the schedule and the first revenue for that will be 2009.

Cobb Sadler - Deutsche Bank

Okay. Thanks very much.

Operator

Thank you. Your next question comes from Jason Ader with Thomas Weisel.

Jason Ader - Thomas Weisel

Yeah, thanks. Jerry, Randy, Eric we're at April 24th now, I think that's today. But, could you give us a sense for the first three and a half weeks of April, whether there has been any change in the environment at all? Obviously, I know March was very tough for you guys. Well, have you been able to close through the deals that slipped? Implicitly of your guidance's I think haven't changed but I just wanted to get a sense of how you're feeling three and a half weeks into the quarter?

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

Yes, thanks. So obviously, we thought about nothing else but this since April 1st and we don't give quarterly guidance but we've been very active doing bottoms up review to the pipeline and the sales force deal by deal, customer by customer, sales rep by sales rep, geography by geography. I was over doing that in Europe, Randy took the East Coast last week, Dave Peranich, our VP of Sales is in Asia right now finishing that off. And it's universally an optimistic look. I mean the sales force does feel good about it. And we may have underestimated the seasonality in our business really, people finish up December and they start rebuilding their pipeline and get going and it's really the June quarter where these guys start popping it in the new quota year. The view from the field is quite strong based on what those reviews show, if we could use our old metrics, we'd probably guide higher given our miss last quarter and the uncertainty, we're factoring down considerably from the size of the pipeline and trying to give good guidance based on a conservative view.

Jason Ader - Thomas Weisel

Okay. And then if you look at the international market, certainly Europe was a real horse for you in Q1. Is there any signs of some of the same issues in terms of deal closures and downsizing of deals in the international markets at this point?

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

Yeah so, I did go to Europe and spend time there not only with the sales force but also visiting some large customer prospects to go over that. So the Europeans remain quite bullish. I went over there and carried to them the message of what happened at the US and to keep their eyes open and to really focus on sales execution, particularly as they get through the latter part of June so they don't get sort of the US CFO deferral thing. But it's not showing yet, we do worry about it. We are alert to it and we're going to chase it day by day, deal by deal, right to the end of the quarter.

Jason Ader - Thomas Weisel

Okay and then just two final housekeeping questions for Randy. Randy, for Q2 I think you gave the -- be at the top and bottom line guidance, could you give us a sense of what you expect on the gross margins and OpEx? And then secondly, first from a cash-flow statement what was your CapEx and D&A in the quarter?

Randy S. Gottfried - Chief Financial Officer

Sure. So a little bit on -- in general for gross margins, we've talked about over the last couple of quarters, a range of 74% to 76% gross margins. We believe we expect to be in that range going into Q2. OpEx, we are still hiring though at a much more modest level. In absolute dollars we expect those numbers to go up, I'm not sure if we've seen it. A dramatic change in the composition of expenses in Q2. You'd also asked about our CapEx, CapEx was only about $0.5 million, actually I'll get you the exact number here. We had about $512,000 of CapEx in the second quarter -- in the first quarter, excuse me. We are still spending, still modestly investing on the CapEx side as well.

Jason Ader - Thomas Weisel

The D&A?

Randy S. Gottfried - Chief Financial Officer

Depreciation about just over $2 million. $2.1 million actually for the first quarter.

Jason Ader - Thomas Weisel

Okay.

Randy S. Gottfried - Chief Financial Officer

And our stock-based comp which is another big cash non-cash item.

Jason Ader - Thomas Weisel

Okay. Thanks guys. Good luck.

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

Thanks Jason.

Operator

Thank you. Our next question comes from the line of Ryan Hutchinson with Lazard. Please go ahead.

Ryan Hutchinson - Lazard

Good afternoon. I asked this on the last call but maybe Eric could spend a little time on this since I know he has done a lot of the work on the competitive landscape. And just following the mist, you've had some time to walk through each deal and what not as you've highlighted, but were there any signs with any other deals, were there where competitive stall tactics in place that maybe stalled the deals initially and since then they've closed?

Eric Wolford - Senior Vice President of Marketing and Business Development

Yes, so -- hey Ryan, this is Eric. Yeah, we did just as our normal, we did our normal routine where we go through every win, every loss, I try to understand what happened and the good and the bad. And just high level of the competitive landscape hasn't dramatically changed. The amount of times where we're unopposed is about the same and the win rates stay pretty consistent. And then competitive stall tactics, there is no question that competitors and Cisco definitely does delay deals, and they have in the past and they did again this quarter. But I can't over attribute that to the cause of the miss this quarter. It did occur, did it occur much more than the previous quarters? Maybe a little bit, but it isn't the salient factor. And you have something else, Ryan?

Ryan Hutchinson - Lazard

I guess, so have some of those deals that slipped or were stalled or whatever however, you want to characterize that?

Eric Wolford - Senior Vice President of Marketing and Business Development

Yeah, so for sure I mean, so deals that didn't make it into this. There was a bunch of them that didn't make it into Q1, they rolled into Q2. Some of them have closed and some of them haven't, and they are factored into the guidance.

Ryan Hutchinson - Lazard

And then do you care to comment at all on the -- this Blue Coat Packeteer announcement? And how that could impact you guys moving forward?

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

Yes. So, that's something we observed, it's always interesting, it kind of happened in slow motion because they were -- Packeteer was available for quite some time in the marketplace.

Ryan Hutchinson - Lazard

Sure.

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

So we thought about it of course during those phase and it's just that they're -- they have a solid respectable product in the QoS visibility side but you can think of it as a potential acquisition, sort of no revenue growth or negative growth and core profitability. And not really in addition to our channel, so it's hard to get excited on our side for something -- maybe it appeared to us was maybe a way to pick up some installed base, but buying installed base at a price and a price of both cash and distraction and integration, I think there is some value in it, whether the value is worth the price remains to be seen. Over the three years we've sat here and seen (inaudible) and then Packeteer pick up Tacit and our Blue Coat pick up Packeteer, Citrix pick up Orbital Data, F5 pick up Swan Lab. So in general for us it's really been the subtraction of a competitor from the marketplace more than anything else. So we'll see, but we don't really see a change in our landscape if other than maybe just one less group of sales guys out there.

Eric Wolford - Senior Vice President of Marketing and Business Development

And Ryan you know in our -- we talked before about Packeteer is a mature technology that wasn't particularly competitive on our space to begin with. We don't do enormous amount of battles with them and our win rate is exceedingly high. So we don't view the combination of the two as something that concerns us deeply, we respect it, we watch it for sure but going forward, looking at win rates in the amount of times we compete with them, it just isn't as significant as competing with Juniper and Cisco.

Ryan Hutchinson - Lazard

Understood and then finally for Randy, the IP litigation that you've highlighted for -- in the guidance, is that something that we should consider at these current levels over the course of the year on a quarterly basis?

Randy S. Gottfried - Chief Financial Officer

I think there has been no change to that outlook but yeah, I think we're still spending at roughly that amount per quarter.

Ryan Hutchinson - Lazard

Great. Good luck, guys. Thanks.

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

Thanks Ryan.

Operator

Thank you. Our next question comes from the line of Andrew Nowinski with Piper Jaffray. Please go ahead.

Andrew Nowinski - Piper Jaffray

Hi guys thanks for taking my question. Troy Jensen could make it. Just had a quick question regarding Steelhead Mobile. Was the $2 million kind of roughly inline with your expectations and then what are the typical attach rates that you see with Steelhead Mobile on some of your larger deals?

Eric Wolford - Senior Vice President of Marketing and Business Development

Yes, so, as Jerry had mentioned on the call in terms of our expectations, I think we all mentioned that our expectations for the quarter were probably higher than what actually occurred. So I think in that context, Steelhead Mobile fared like the other products right in terms of -- we had wished there was more. At the same time, we are encouraged by the fact that the Steelhead Mobile funnel continues to build nicely, and that we do have hundreds of Steelhead Mobile controllers going out into our base of customers. So I know it's probably over close to 20% of our customer base is either evaluating it or has purchased it.

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

And the mobile revenue grew faster than any of our other products this quarter.

Andrew Nowinski - Piper Jaffray

Are you guys seeing any -- do you guys measure any kind of attach rate when you sell Steelhead appliances? Are customers also buying the mobile with it or just kind of testing it out at first?

Eric Wolford - Senior Vice President of Marketing and Business Development

Yes. Everybody starts testing it. That's for sure. Everyone starts testing it and is it an important factor in Steelhead sales? It is an important factor in Steelhead sales. When we get a little more experienced whether we will be able to give you more data on the attach rate.

Andrew Nowinski - Piper Jaffray

Okay. And the Last question. What about linearity in the quarter? Is it the same as normal, 50% in the last month?

Randy S. Gottfried - Chief Financial Officer, Senior Vice President - Business Services

We typically do not call out details but we in general target about 50% for that last month of the quarter.

Andrew Nowinski - Piper Jaffray

Okay, great. Thanks guys.

Operator

And your next question comes from the line of Nigel Frankson with Citigroup. Please go ahead.

Nigel Frankson - Citigroup

This is Nigel, I am actually calling for Paul Mansky. Just a couple of quick questions. One, if you could characterize for me why was it that you were so late in seeing the deteriorating macro backdrop affect your business or I mean, as recently as your December quarter conference call, you didn't see any signs of a slowing environment impacting your business? Most Wall Street analysts probably assumed that would happen. The economists were certainly calling for that to happen. I mean, frankly, why didn't you see it coming in, why might you see it coming next time? Or what could you change to improve your visibility to your business?

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

That's a fair question Nigel. So to repeat what we said on our December conference call, we had just come off our 15th consecutive quarter of top of world growth, a year that was huge in growth a quarter that might help us 21% quarter-on-quarter growth with a big pipeline in hand. And every piece of actual reality that we had experienced up until the time we gave our guidance was very positive. There wasn't an environment in the background of television and reports and, as you say, something about the economy slowing down. In a business where 50% of your revenue comes in the last month of the quarter, right to the very end, we had a real chance of hitting our guidance right to the very end of March.

And so frankly with a bit of luck and just a little better execution by our sales guys, we would have gotten to our guidance number. And so should we have factored the economic overview in, more strongly in January probably, we probably messed that up but we were coming off an incredible year, and an incredible quarter and a very robust pipeline and that's what happened.

Nigel Frankson - Citigroup

And last question, you rattled off a list of WAN optimization mergers that have taken place in the last couple of years. In my opinion, none of them have actually worked. I was wondering if there was any consistent common denominator here why that would be the case? Is there something about this industry where organic growth is perhaps the better path to take? Is there any reason why a combination of Packeteer and Blue Coat's product offerings has significant obstacles that, perhaps on a technological side, I really don't have a lot of insight there.

Eric Wolford - Senior Vice President of Marketing and Business Development

Sure. Yeah Nigel this Eric hi. Yeah I mean we definitely had some strong opinions on that as you might imagine and our experience suggests that integration, when you don't have the architectural foundation right and you are just integrating components and it's not a uniform architecture, or a uniform design designed from the ground up correctly, that you can actually increase complexity and you can increase defects and you can actually not get the synergy that you were hoping for. And so that experience that we've had seen all these acquisitions of our competitors take place in their space just gives us a lot of confidence that, hey, that combination that we've just described has got 18 months of integration ahead of them, tons of customer uncertainty and it's going to challenge them and negatively impact their execution. And that's just what the pattern suggests looking backward. And so there are fundamental technical architectural reasons why you don't want to take two things that are disparate and put them together. You really have to go with one bottoms up designed architecture until that has what -- one of the things that has made as hesitant in these type of opportunities.

Nigel Frankson - Citigroup

Okay, thanks.

Randy S. Gottfried - Chief Financial Officer

Thank you.

Operator

Thank you. Your next question comes from the line of David Kozlowski with Signal Hill. Please go ahead.

David Kozlowski - Signal Hill

Hey folks. In the beginning of your prepared comments, you mentioned the slowing of deals. I guess you're talking about slippage and also that there was smaller initial purchases than you planned. Do you see any slow rolling where you will see initial recurring revenue on these deals in the future and can you give us an idea of the magnitude of the slippage as opposed to just deal loss?

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

Let's see. I think what I can say is that besides the opportunity remains the same for the customer whether the -- and our business is kind of interesting because everyone buys as the different pattern. Some buy a ton upfront and then a few little deployments over time. Some bite if you at a beginning and that could be the same size company and then at the end they will buy the same amount over a period of time, and it is just the pattern of buying. And so we think, besides the opportunity comes from the size of the customer and their sites and what they will deploy over time and is less indicated by what the initial first buy was. And so the addition buyers maybe more modest in a tougher climate, but the value of the customer remains the same to the Company. So, and -- we think that is encouraging for the ultimate value of our install base.

David Kozlowski - Signal Hill

And you talk -- a lot of this is in reference to the large deals. Do you have like the threshold of what you call a large deal, a dollar number?

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

Yes over a $1 million is what we call a large deal.

David Kozlowski - Signal Hill

Okay. Thanks.

Operator

Thank you. Your next question comes from the line of Bill Choi with Jefferies & Company. Please go ahead.

Min Chou - Jefferies

This is Min Chou [ph] for Bill. Couple of real quick questions. One, can you talk about what kind of channel or customer overlap you might have with Packeteer?

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

Well, Packeteer's basic product line and almost all their revenue comes from selling QOS and visibility products. They have virtually no revenue from selling Linux alteration, so there's almost no overlap. They have an enterprise sales force and they sell through channel partners, but that's sort of where the similarity ends.

Eric Wolford - Senior Vice President of Marketing and Business Development

I think we may have some channel partners that are the same. I don't note that it's an extensive overlap, but to be honest with you, I can't specifically comment without doing a little more work.

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

I mean there are plenty of customers who have both Packeteer and Riverbed side-by-side in their networks. There's a ton of those, frankly, because they are really two different products.

Min Chou - Jefferies

But do you see like an opportunity to go to a channel partner and say just taking Blue Coat here or you can take Riverbed plenty one and once this integration happens? Because I'm sure there will be some disruption because of deposition.

Eric Wolford - Senior Vice President of Marketing and Business Development

Yeah, there will definitely be an opportunity that this will prompt churn. And it will be an opportunity for us to go in and say, we are going to make, take steps in execution to try to take advantage of that as we have in the past when other competitors of ours have been acquired.

Min Chou - Jefferies

Okay. And could you talk about the strength in Europe? Was it broad based or any particular -- was it large deal sizes or was it -- any color there?

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

It was fairly broad-based. We were particularly strong in Northern Europe, Central Europe and the Middle East, actually, which is part of Europe. Our European organization tends to focus even more than the US on the really biggest companies. Although, like everywhere, we get a mix of small, medium and large but Northern Europe which, to us, is UK and the Nordics and Benelux, and then Central Europe, which is Austria, Germany, Switzerland, Poland and the Eastern Bloc, we're particularly strong.

Min Chou - Jefferies

Okay. And one last thing, I mean, in terms of I mean I know you don't give out the average deal size, but definitely there was a decline in terms of new customers. Probably the deal sizes were smaller. Any change with the existing customers on average deal prices?

Randy S. Gottfried - Chief Financial Officer, Senior Vice President - Business Services

Not a terribly big, in general, big deals were down. There were some of those that the deals we talked about were existing. A lot were new customers as well. So, but on the existing size, there wasn't a huge change.

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

We have a very robust run rate business with just a lot of transactions, a lot of repeat sales, a lot of sales between $20,000 and $100,000 a piece. That's a huge part of our business. It's a nice run rate business we have.

Min Chou - Jefferies

Okay. Alright thanks a lot guys.

Operator

Thank you. Your next question comes from the line of Scott Zeller with Needham & Company. Please go ahead.

Scott Zeller - Needham & Company

Thanks. When you did your call prior to this one, you were saying that you were targeting sequential growth for the June quarter. Today in the guidance commentary you seem pretty comfortable with the quarter-to-quarter growth. Has something changed in the past couple of weeks that has given you more confidence?

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

We've spent three weeks just pounding on the pipeline on the sales organization, the deals, deal by deal, name by name, dollar by dollar. And you take a robust pipeline with a seasonally stronger quarter with a laser focus on sales execution, a message delivered all over the company and actually matured by, I think we think some of the other results have been good. So we feel good about the guidance we've given for Q2.

Scott Zeller - Needham & Company

When you say other results, you mean other companies that have reported and given their outlook?

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

That's correct.

Scott Zeller - Needham & Company

Okay. Thank you.

Operator

Thank you. Next question comes from the line of Saud Masud with UBS. Please go ahead.

Saud Masud - UBS

Thank you for taking my question here. Guys just on long-term operating margin, I believe your target was or is, I assume, 25% with potential upside coming from traction in Steelhead Mobile. Can you provide some color on --? Are you still holding to that target or any change to that?

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

That's still our target. We think it will take longer to get there now. We no longer feel we'll hit that by the fourth quarter of 2008, but we do think we will get there and it will just be a little farther out.

Saud Masud - UBS

Okay. Fair enough. And can you maybe just elaborate little bit on the supply chain adjustments that you foresee going forward and maybe any insights into impact on cost or turns?

Randy S. Gottfried - Chief Financial Officer, Senior Vice President - Business Services

Sure. In general, we've had sort of constant improvement in our supply chain management. We had some volatility in certain of our inventory balance over time. You know, there is number of things that impact that. Adding depose and operation centers in a variety of places. We don't go into a whole lot of specifics for competitive reasons, but in general we look for sort of ongoing improvement and efficiency though there may be some quarter-to-quarter variability in some of the inventory balances.

Saud Masud - UBS

Okay. Thank you.

Operator

Thank you. Your next question comes from the Rohit Chopra with Wedbush Morgan. Please go ahead.

Rohit Chopra - Wedbush Morgan

Hi guys. I had a couple of questions. I thought maybe it would be important to talk about that new security partnership that you have. What prompted it and maybe the revenue contribution or opportunity that you see with that?

Eric Wolford - Senior Vice President of Marketing and Business Development

Yeah sure Rohit. This is Eric. That's part of something called our Riverbed Services Platform, RSP, which was a new bit of functionality that was in our 5.0 release that Jerry mentioned. So it isn't just for security of course. It is for a variety of other functionalities that customers have some interest in putting on our box. So other things include application sensors, streaming media, even active directory domain controllers, a whole variety of things people want that they would like to put on the box. What we found, though, is that there isn't -- it's a very fragmented set of demands so we need to be able to offer a wide variety of things. And one of those things that some customers have an interest in is some form of UTM, Unified Threat Management And so we have struck up some partnerships with who we think are leading companies. Best-of-breed is our strategy with Riverbed Services Platform, so that customers can take advantage of the synergy. Run on one-box and have best-of-breed technology.

Rohit Chopra - Wedbush Morgan

Thank you. And then, the earlier question was, what type of projects were the projects that got stalled? The deals that got stalled, the $10 million. And did you guys go back to a post mortem on that to sort of -- was it in any type of area that you can sort a focus on? I'm just trying to get a sense of the environment and what people are actually pushing into the next quarter?

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

It's a broad cut of the pipeline by the -- our six or seven largest verticals. It's the typical projects, data center consolidation, branch office performance. So it's --

Randy S. Gottfried - Chief Financial Officer

Basically across verticals but the only thing that was consistent was in the United States.

Rohit Chopra - Wedbush Morgan

Okay. So it was all US based, there was nothing else?

Randy S. Gottfried - Chief Financial Officer

That's right.

Rohit Chopra - Wedbush Morgan

And then did you mention the number or the size of deals that did close out of the ones that slipped so far in the -- I guess, one month?

Randy S. Gottfried - Chief Financial Officer

Yeah we've -- I mean, what we said was we've had quite a few deals which is not surprising. In quarter-to-quarter you have deals that slip and so we had just more that slipped this quarter from one quarter to the next quarter. Of those we didn't put a number on it specifically but there have been deals from that group that have closed and there are deals that are in our forecast to close this quarter.

Rohit Chopra - Wedbush Morgan

Thank you. That's it.

Operator

Thank you. We have time for one final question and our final question is a follow-up from the line of Jason Ader with Thomas Weisel. Please go ahead.

Jason Ader - Thomas Weisel

Okay, thanks. I want to see if you guys could give us a little more insight into what you have coming on the storage side? I know you've talked about it somewhat cryptically, thus far I know for competitive reasons you probably don't want to talk about it too much, but could you give us a little bit more in terms of timing of when you're going to get this in front of customers and channels?

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

Yeah.

Jason Ader - Thomas Weisel

And any other color you can provide would be great.

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

Sure, that's a fair question. So we're finishing the coding now and we expect to go into Alpha in the early summer and try to get to Betas by late summer/early fall with the product being a revenue product in 2009. And our plan is probably late in the summer when we've had some experience with real customers that is validating, that we will come to the investment community and do a presentation, talk in detail about the product and our vision, and the early experiences of the early Alpha/Beta customers.

Jason Ader - Thomas Weisel

Okay. And do you envision this product is going to be sold to a different buyer in the Data Center in the enterprise than you are currently selling to?

Eric Wolford - Senior Vice President of Marketing and Business Development

Ader we've been obviously testing that, quite a (inaudible) I shifted gears on there. This is -- we've definitely been testing that and we have found that many of the buyers of steelheads also are quite interested in this project as well. And so that's because Data Center consolidation is -- it's very related. So, I know we're being still somewhat cryptic but I do promise a full detailed explanation of this. We're going to get everybody together at the end of summer.

Jason Ader - Thomas Weisel

Okay, thanks a lot guys.

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

Well, thank you everyone for being on the call. We appreciate your attention and we look forward to the next call.

Operator

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation and thank you for using AT&T conferencing. You may now disconnect.

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