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Sourcefire, Inc. (NASDAQ:FIRE)

Q2 2012 Earnings Conference Call

July 31, 2012 17:00 ET

Executives

Staci Mortenson – Investor Relations

Marty Roesch – Interim Chief Executive Officer and Chief Technology Officer

Todd Headley – Chief Financial Officer

Tom McDonough – Chief Operating Officer

Analysts

Jonathan Ho – William Blair

Scott Zeller – Needham & Company

Rob Owens – Pacific Crest

Brent Thill – UBS

Walter Pritchard – Citi

Dan Cummins – ThinkEquity

Keith Weiss – Morgan Stanley

Shaul Eyal – Oppenheimer

Ron Zember – Bank of America

Jonathan Ruykhaver – Stephens

Shebly Seyrafi – FBN Securities

Operator

Good day, ladies and gentlemen, and welcome to the Sourcefire Q2 2012 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Staci Mortenson. Please go ahead.

Staci Mortenson

Thank you. This is Staci Mortenson, Sourcefire’s Investor Relations representative. I want to thank you for joining our second quarter 2012 earnings conference call. Joining me on the call is Marty Roesch, Chief Technology Officer and Interim Chief Executive Officer; Todd Headley, Chief Financial Officer; and Tom McDonough, Chief Operating Officer.

Before we begin, I must remind you that statements made in this conference call and in our public filings, releases and websites, which are not historical facts, maybe considered to be forward-looking statements that involve risks and uncertainties and are subject to change at any time.

We caution investors that any forward-looking statements made by us are management’s beliefs based on currently available information and should not be taken as the guarantee of future results or performance, which may differ materially as a result of variety of factors discussed in our earnings release that was issued today, and our Form 10-K filed with the Securities and Exchange Commission.

We disclaim any obligation to update any of these forward-looking statements or to announce publicly the results of any revision to any of the forward-looking statements to reflect future events or development. There is more complete information regarding forward-looking statements, risks and uncertainties in the company’s filings with the SEC available on our website at www.sourcefire.com.

In addition, we may discuss non-GAAP financial information on the call. This information is reconciled to comparable GAAP financial information in the earnings release. The full earnings release can be found on our website. An online replay of this call will be available on the Investors section of our website for at least 90 days.

With that, I will turn the call over to Marty Roesch, Sourcefire’s Interim CEO and Chief Technology Officer.

Marty Roesch

Thanks Staci and good afternoon everyone. Before we begin, for those of you expecting to hear John Burris’ voice, as a reminder, we announced on July 2 that he has taken a medical leave of absence. In the interim, you’ll be hearing from me regarding the strategy and direction of the business.

Q2 was yet another very strong quarter for Sourcefire. Our success continues to be driven by the adoption of our Agile Security vision. This vision is built upon providing customers with two critical elements, visibility and control. In the real growth, IT organizations are paced with rapid change in dynamic environments that require security infrastructure designed to leverage awareness in order to provide the best protection against today’s threats. Our technologies are significant enablers that allow our customers to see more and thus protect more.

Strong demand for our core Next Generation IPS offerings powering by the FirePOWER platform and our growing distribution capability continued to drive positive financial results. While still early in their lifecycle, our Next Generation Firewall and FireAMP products are key pieces of our Agile Security vision. They are increasingly becoming important factors as customers evaluate how to best protect their organization today and in the future. We remain confident in our ability to capture our fair share of business in our expanded adjustable market and to drive significant levels of revenue growth and increased profitability.

Before handing off the call to our CFO, Todd Headley who will provide more detailed financial information, including our guidance for the third quarter and updated thoughts on the full year, I want to talk to you about three things. One, a brief overview of our financial results for the second quarter; two, an update on the industry analyst views; and three, most importantly, a more in-depth look at our solutions and why our approach to cybersecurity based on visibility and control, and weekly addresses changing threat landscape and sets the stage for our continued development.

Now, first, financial results, second quarter 2012 revenue was $50.6 million, an increase of 39% over the second quarter of 2011 and we generated an adjusted net income figure of $4.9 million or $0.16 per diluted share. These results exceed the top end of the guidance we provided on our Q1 call and saw strength across all sectors of our business the year ago quarter as a result of our continued international expansion, investment in our sales channels, and strong adoption of our FirePOWER platform. The federal procurement process is stabilized resulting in greater deal flow versus the year ago period and we saw revenue growth of 43% as a result.

Our international revenue increased 55%, which continues strong performance from the first quarter. While we are mindful of the current macroeconomic uncertainty that exists particularly in Europe, we continued to invest there and in other international regions as we believe there remains growth opportunity for us. Our U.S. commercial revenue continued its strong growth trajectory increasing 31% versus the year ago quarter.

We ended the quarter with 691 channel partners, a 47% increase from a year ago as we continue investing to build capacity into our distribution capabilities and educating our sales partners. We experienced a record number of channel partners becoming certified in Q2, which represents a greater level of commitment to our solutions. In fact, the total certifications from this quarter nearly equaled all certifications combined from the prior four quarters. I believe this is a testament to the strength of our products and the market opportunity.

Now, the industry analysts’ view, as pioneers in the security space, we continued to meet the constant changes and challenges faced by professionals in charge of running IT environments and we are being recognized for our innovation. In their most recent Magic Quadrant for Intrusion Prevention Systems analysts from Gartner has once again positioned us as a leader. Additionally, they moved up to the position as the most visionary vendor in the Magic Quadrant. This significantly improves our positioning as most other companies in our space either drops down or were static.

According to Gartner, the network IPS markets are undergoing a period of dynamic evolution as evidenced by the emergence of Next Generation IPS. We’ve pioneered the Next Generation IPS in 2003, when we delivered real-time contextual awareness, post-act visibility and intelligence security automation to our customers. Today, Sourcefire is also the only IPS vendor to offer these capabilities integrated with application control on the same platform.

Gartner also has recently refined their view on Next Generation Firewalls and Next Generation IPSs indicating that there are multiple adoption paths. No matter which migration path the customer takes, the FirePOWER appliance provides a universal platform to meet the customers’ needs. And we’re well positioned to capture our fair share in both the next generation firewall and next generation IPS markets.

And now on to solutions, as we have stated in the past Sourcefire has always been a company with an intense focus on innovation. This is most recently demonstrated by our Agile Security vision the foundation of great security visibility and awareness or as we call it the ability to see. We enable our customers to see more of their IT environment never stress devices, applications and users by providing customers with its information superiority, they can more successfully navigate challenges in the evolving security landscape.

Today, there are market forces at play that are bringing rapid change to the security equation. I would like to focus on three of these that we feel are principle challenges for our customers. Mobilization or bring your device virtualization and the changing threat landscape. The need for employees to access their company networks anytime anywhere as that’s becoming the norm, devices moves on and off networks at a rapid pace and organizations require solutions to securely integrate mobile and employee owned devices into their corporate environments. Our FireSIGHT awareness technologies provide unprecedented visibility into mobile devices on the network and the attacks that target them.

In June, we expanded our FireAMP product line by launching FireAMP Mobile for Android-based devices. FireAMP Mobile is one of the first products for mobile devices that identifies and remediates advanced malware using big data analytics delivering real-time visibility and the control needed to secure these mobile devices against threat. Virtualization is changing IT structures globally allowing them to be more flexible and dynamic, whether its data center consolidation moving to the cloud or virtual desktop infrastructures, virtualization is changing the way we compute and the solutions needed to provide network security.

Understanding what needs to be protected and knowing what attacks are targeting key systems is vital to protecting the integrity of a network. In addition to our current virtual next generation IPS product, in the third quarter we will be launching FireAMP virtual and support for Next Generation IPS with application control running on VMware. Recently, we were named one of the five vendors to watch in virtual data center securities by Gartner.

It’s hard to ignore the fact that companies are struggling to address the changing threat landscape. We launched FireAMP earlier this year as a solution for visibility and control over advanced malware on devices. Today, we are announcing the addition of the same technologies used by FireAMP into our FirePOWER platform. This will provide customers with continuous visibility to see advanced malware, inbound, outbound and inside the network, both in real time and retrospectively.

Targeted for delivery before the end of this year, customers will be able to add this functionality through an additional license key. This creates a smarter way to buy advanced protection and reduces the need for additional appliances to address the advanced malware issue. We will continue to innovative and active leaders in bringing visibility and control to the security equation. We are confident in our growth prospects as we increase our reach in our expanded markets.

One final product comment, before I turn the call over to Todd. Our next generation IPS and FirePOWER platform continued to be recognized as industry leaders and are driving our success. Just last week, NSS Lab introduced its first security value map for IPS, a visual representation of the industry based on security effectiveness and total cost of ownership. Sourcefire’s FirePOWER appliances are the top recommended IPS solutions. This is further third-party validation that we offer the best protection and best value for our customers.

With that, I’ll turn the call over to our CFO, Todd Headley.

Todd Headley

Thank you, Marty. By now I assume that you’ve seen our earnings press release with the attached financial statements and other significant metrics by which we measure the progress and success of our business. I will highlight some of these results for you, talk about some trends and end with our guidance for Q3 and some updated thoughts on the full year of 2012. On the revenue front as Marty indicated, we had a great second quarter. Total revenue up $50.6 million represents a 39% increase over the second quarter of 2011.

This is the third consecutive quarter of growth in excess of 35% and we believe this indicates the continued strong global demand for our solutions, the successful execution of our go-to-market strategy and excellent customer retention. Our federal government business reported revenue of $8.3 million in the second quarter, up 43% over the year ago quarter. We continued to see greater deal flow versus the year ago period and our observation is that the federal procurement process has stabilized.

Year-to-date, our Fed business is up $6.2 million or 51% over last year’s muted pace. We remain encouraged by these results as we enter our Q3, which is the federal fiscal year-end. Seasonally, Q3 is our largest revenue quarter in Fed and we expect that trend to continue this year. However, as a remainder in 2011, the slow start to the federal fiscal year procurement process led to a very back-end loaded deal flow and a disproportionately larger third quarter.

As a result in this third quarter, we have a challenging year-over-year compare and would not expect the same sequential improvement as we saw last year. Both our U.S. commercial and international businesses are significant growth during the second quarter of 2012. These strong results were driven by our best-in-class solutions, running on FirePOWER and the effective execution by our growing sales channels. U.S. commercial revenue increased 31% to $27.6 million. International revenue increased 55% to $14.7 million and after our outstanding first quarter there, we are pleased to follow it up with such a strong performance.

Looking at our two revenue lines, products and services, we saw growth in Q2 of 2012 for both lines over the year ago period at 43% and 33% respectively. During the second quarter of 2012, our sales force and partner channel combined to close 98 new product customers, 83 six bigger transactions, and 13 transactions in excess of $1.5 million. All of these figures exceed their year ago compare.

Okay, turning to gross margins. Product gross margin for the second quarter of 2012 was 71%, which is identical to the figure in the year ago quarter and up 4% from Q1, what we saw some product margin pressure. We attribute the current quarter rebound and the product margins to a more favorable product mix. Services gross margin in the second quarter of 2012 was 86%, which is the same as the year ago quarter. The predominant portion of our services business continues to be maintenance and support provided to an expanding customer base.

This is complemented by a modest amount of professional services and training that is targeted at the certification of a knowledge transfer and knowledge transfer too, are growing distribution channels. In the second half of 2012, we anticipate ramping up our training efforts to ensure our growing channel is up to speed on our solutions and this could put some pressure on our services margins. With a significant growth in our second quarter of 2012 product revenue and in more favorable product mix, total blended gross margin was 77% which compares to 78% in the second quarter of 2011. We still believe that with the inclusion of the FireAMP infrastructure and the average underlying cost of the FirePOWER platform versus the former hardware platform and some additional investments in services, that our blended gross margins will face some pressure from current levels in the back half of 2012.

Now, let’s move on to our operating cost. Please note that these are GAAP figures and thus include non-stock based compensation charges and with regard to R&D to retention cost from our December 2010 acquisition of Immunet. Both stock-based compensation and retention costs are excluded from our adjusted operating results. Q2 of 2012 is the final quarter in which the retention charge is included. Total operating expenses for the second quarter were $37.5 million, an increase of 30% over the $28.9 million in the second quarter of last year.

We continued to invest significantly in our product innovation and go to market activities, specifically in support of our new solutions and in the expansion of our global distribution footprint and expect these trends to continue and aggregate spending to increase.

Now, let’s take a closer look at operating margins, net income and EPS. In the press release we issued this afternoon figures are included in both GAAP and adjusted for non-GAAP form and we explain the nature of these items that are excluded when arriving at adjusted results.

I want to highlight some of these adjusted figures which we believe are meaningful indicators of trends in our business. Adjusted operating margin for the second quarter of 2012 was 15% versus 10% in the second quarter of 2011 and ahead of our expectations due to the revenue out performance. Adjusted net income for the second quarter of 2012 was $4.9 million or $0.16 per diluted share compared to $2.4 million or $0.08 per diluted share for the second quarter of 2011.

Based on our current 2012 projections and given the amount of our net operating loss carry forward for tax purposes, we do not anticipate being a cash payer for federal tax purposes. We also believe our long-term effective GAAP tax rate will approximate 35%. But as we continue with our tax planning we expect the GAAP tax rate to vary. However, as we have done in the past we will continue to normalize our adjusted quarterly results to reflect in overall assumed tax rate of 35%.

For the second quarter of 2012, we generated $2.6 million in cash from operating activities and spent $1.5 million on capital expenditures resulting in free cash flow of $1.1 million. Due to seasonality trends around our AR balance, we typically generate our most significant free cash flows in our first and fourth quarters. So, this modest figure was anticipated. As of June 30, 2012 cash, cash equivalents and investment totaled $181.9 million.

Turning to guidance, for the third quarter of 2012 we expect revenue in the range of $54 million to $56 million. Net income per diluted share is in the range of $0.04 to $0.06 and on an adjusted basis net income per diluted share in the range of $0.19 to $0.21. Our expectation of adjusted net income for diluted share excludes stock-based compensation expense for the third quarter in an inspected range of $7.2 million to $7.4 million. And the amortization of acquired intangibles of approximately $300,000 and it assumes normalize tax of for 35%.

The revenue guidance for Q3 which is 22% year-over-year growth at the mid point reflects our strong business momentum against this somewhat more difficult compare, due primarily to last year strong third quarter federal revenue performance as noted earlier. As a reminder we also saw acceleration of our business in Q4 of 2011, which will make Q4 a difficult compare when looked that on in absolute percentage of growth basis. For the full year of 2012, we now believe that we can grow our top line in the high 20% range. This belief is based on the following observations. A growing awareness and increasing demand for our innovative high-performance cybersecurity solutions, a more stabilized federal spending environment through at least the remainder of the current federal fiscal year, which is our third quarter, and the continued expansion of our sales channels.

Regarding our adjusted operating margin, we remain committed to delivering approximately 100 basis point improvement for the full year 2012 over 2011. On previous calls, we have shared with you our strategy of balancing margin expansion with driving revenue growth. We have done that through the first half of the year and planned to do so over the second half, namely invest upside from the top line, back into the business in support of our Agile Security solutions, our sales momentum, and to effectively respond to market demand and competition as we expand into a significantly larger addressable market opportunity.

With that operator, we’d like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operation Instructions) Our first question comes from Jonathan Ho from William Blair. Your line is open.

Jonathan Ho – William Blair

Good afternoon guys. Just wanted to touch base a little bit on what you guys are seeing out there in the environment so far in July and how comfortable you are with the pipeline, just particularly if there is anything in the macro environment that maybe it’s concerning guys?

Tom McDonough

Yeah, Jonathan, this is Tom, I’ll take that one. Our business in July has been very good. We continue to see very good pipeline expansion. We actually had a record in terms of percentage increase during the second quarter in terms of pipeline growth and that appears to be continuing into Q3.

Jonathan Ho – William Blair

Got it. And as we look at sort of the growth in the international segment, I mean, clearly comparisons get a little bit tougher in the back half of the year, how should we think about growth in that segment staying out for the second half?

Tom McDonough

Yeah. As the result showed here in Q2, we expect our international business to continue to grow. We are seeing great pipeline growth. We’re closing more large opportunities, as time goes on both in APAC, LatAm, and the EMEA region and we expect to continue to see strong growth.

Todd Headley

Yeah, Jonathan, this is Todd. As we have indicated in past calls, it’s a time and territory thing and we now have people internationally that have been in territory for a reasonable amount of time, such that their pipelines have built and they are starting to see the kind of deal flow that some of our U.S. based guys saw after a couple of years being in the territory. So, we are very positive on continued international growth.

Jonathan Ho – William Blair

Great, thank you.

Operator

Our next question comes from Scott Zeller from Needham & Company. Your line is open.

Scott Zeller – Needham & Company

Thanks. We heard your update on calendar ‘12 top-line, but could you update us on the federal outlook, we heard 500 to 600 bps previously?

Todd Headley

Yeah. So, this is Todd, I’ll take that one. So, kind of as a remainder, we’re up 51% year-to-date in terms of growth over 2011. And I think we candidly said on the call don’t expect us to sustain that in Q3 here with the more difficult compare. The pipeline is solid, but again we are not federal procurement experts. The pipeline is larger. And so far we have a lot of positive signs coming from the federal team. So, we continue to be well-positioned and we expect that when you – when the dust settles on the full year, we’ll at least 500 to 600 basis points probably better than that, but hard to tell if we can get into double-digits and if we can help significantly. Again, when you look at the U.S. business and the international businesses, the combination of those two appears to be growing in excess of 30% and then the fed is going to be up probably still single-digits, but possibly little higher than what we’ve indicated today.

Scott Zeller – Needham & Company

And regarding the VARs, I believe I heard earlier that you added 47% more partners year-over-year, could you tell us for the VARs and partners you have in the field? Are there any productivity metrics that you feel comfortable sharing about perhaps what percentage of them is contributing revenue per quarter?

Todd Headley

Yeah, Scott, we don’t break that out specifically, but I can’t tell you and Marty actually said this in the script is the fact that the certified partners, the training program that we put in place has increased the number of certified partners dramatically. And as a result of that, we are beginning to see continued increase in demand for our solutions. So, the investments that we are making are really beginning to payoff.

Scott Zeller – Needham & Company

And how would you characterize the productivity of those who are certified versus non-certified? Is there a noticeable jump once it becomes certified?

Todd Headley

Yes, absolutely, there is. Everything from their ability to identify opportunities to complete throughput concepts to actually closing opportunities, there was absolutely a dramatic increase.

Scott Zeller – Needham & Company

Thank you.

Operator

Our next question comes from Rob Owens from Pacific Crest. Your line is open.

Rob Owens – Pacific Crest

Great, thanks and good afternoon. I guess, along those lines what percentage of the basis certified at this point?

Marty Roesch

Rob, could you repeat the question please?

Rob Owens – Pacific Crest

Yeah, sorry about that. What percentage of the reseller base is certified at this point?

Marty Roesch

It’s in excess of 50%, Rob and it’s growing by the quarter as we make these investments in training and education for our partners.

Rob Owens – Pacific Crest

Okay, great. And then as you look at the expansive growth in channel partners, and I guess juxtapose that with just new customer additions, they were pretty flat on a year-over-year basis and just curious what’s going on with new customer acquisition?

Marty Roesch

Yeah, new customer acquisition, it’s varied, if you look at the numbers over the last eight quarters or so. We added some really significant new customers in terms of large enterprises I know was a good mix with medium size customers in different industries. So, as far as I am concerned, the trend is moving in the right direction. We’ll continue to see new customer growth.

Todd Headley

And Rob as a follow-up, this is Todd, if I look across the last eight quarters we’ve had a low in terms of the contribution of revenue from new customers of 11% and a high of 33%. So, it can vary as Tom indicated in between any two quarters. We look at new customers coming into the Sourcefire family as a very positive thing, because the trend is that those customers buy more of our solutions, and so we expand our footprint within those customers over time. And you can see that manifest itself in the sales to existing customers. And again, for everyone’s benefit, when a customer buys in one quarter, that’s a sale to a new customer. If they buy the very next quarter, we actually count that sale as the sale to an existing customer. So, I know some other companies handle that differently, but again for us, the fact that we continue to acquire new customers at a very reasonable pace, I think foreshadows good growth for us in the future here.

Rob Owens – Pacific Crest

Great. And then lastly on the margin front, I think at the high end of your Q3 revenue guidance, it implies about 18% or so operating margin on a year-over-year business, now it actually be down year-over-year. Then frankly just looking at the second half with only one point of margin expansion for all of ‘12, you are effectively guiding the back half down. So, I guess just some color around what is ramping within OpEx or what is the reasoning for that? Thanks.

Todd Headley

Sure. Well, as I said on the call, we are investing in all areas. We are getting into a huge addressable market and we want to make sure that we are investing prudently into that. On past calls, we said that we would balance additional spending in the business again revenue upside. So, with 50% growth in Q1 and 39% in Q2, I think it’s fair to say that we have seen some revenue upside so far for the year. And then in the first half of the year, we had some easier comparison and I think our year-to-date adjusted EPS reflects that over performance. In the second half, the comparison gets somewhat more challenging. And as I said, we are committed to delivering improved earnings of again 100 basis points. We have dialed to turn in levers. We can pull to make it better than that, but again, given the macroeconomic environment, given a little bit of unknown in the fed and the U.S. election, we haven’t changed our guidance philosophy for the past several quarters and I think we are going to kind of stay in line with that philosophy with regard to the bottom line.

Rob Owens – Pacific Crest

Great, thank you.

Operator

Our next question comes from Brent Thill from UBS. Your line is open.

Brent Thill – UBS

Good afternoon. Marty, just on the Next Generation Firewall, can you give us a sense on the traction and some of the milestones that you passed? And I had a quick-follow up to Todd?

Marty Roesch

Well, we are very pleased with our progress today. It is early in the product lifecycle, but the early indications are we are going where we want to go. So, we are very happy with what we’ve seen so far.

Brent Thill – UBS

Okay. And no specific updates in terms of customer wins are size of the deals that you are seeing at – in the field.

Marty Roesch

Yeah.

Tom McDonough

Brent, this is Tom. Yes, the number of deals that we did in Q3 was significantly higher than the ones that we did in Q1. And as I said earlier in some of my commentary, we continued to see large increases in pipeline growth and that’s along all of our product categories from FireAMP and Next gen IPS through the Next Generation Firewall.

Brent Thill – UBS

Okay, great. And Todd just on the federal side, you obviously had a great Q3 last year and can you just contrast what you are seeing as it did in terms of the differences this year versus last year considering your comments in the pipeline and more stable, why we shouldn’t expected a decent Q3 for us?

Todd Headley

Well, I think, we’ll see a Q3 plus, I mean, I think history is going to repeat itself in that regard. It will certainly be our largest quarter in the Fed for the calendar year 2012. I think the caution that we’ve talked about is that the federal business a year ago given the fact that there were multiple continuing resolutions. That federal business was extremely flat for three consecutive quarters and they were short of this pent-up demand that all got flushed through the system and came home in Q3 for us last year. Frankly, the only thing that surprised us a year ago was the fidelity of which those yields got through they system given the constricted amount of time.

So, this year in contrast, deal closes started earlier in the year and obviously the results sort of dictate or indicate that. We feel really good about Q3. We feel we are well-positioned. But again the caution there is – it’s the federal government, it’s the election year. We are not procurement experts, I’d hate to just clean out too far and say every things returned to normal and there is going to be no disruption. So, we are cautiously optimistic in terms of what we are going to see when all the dust settles for this quarter, but it’s going to be one of those things we will see and talk about in next quarter’s call as to how good that Q3 really was.

Brent Thill – UBS

Thanks for the insight.

Operator

Our next question comes from Walter Pritchard from Citi. Your line is open.

Walter Pritchard – Citi

Thanks, Todd. I just had a quick question on the maintenance tax of course looks like it was relatively flat in the quarter and you guys have had pretty strong product sales in the last three quarter just wondering was there something one-time in last quarter number that makes EBITDA for comp or commentary in that would be helpful.

Todd Headley

Sure, Walter, there is actually two things, there was a little bit tougher comp, we had a very significant federal deal that we anticipated closing in Q2 that it actually expired that didn’t cross the (trends) before the quarter ended. So, we don’t recognize any support revenue until we actually get the purchase order in our hands. So, I do expect an up-tick here in Q3 as that thing comes through the. Pipeline and in the previous quarter, we actually had the same issue relative to something that carried over from Q4, which pushed that up a little bit more than originally anticipated, which again led to results that were – when you are looking and combined with product revenue 50% better than the year ago quarter. So, I think it’s just timing really coming to interview there. But our customer attention is similar to what it’s been in past quarters and we continued to sell into that customer base pretty aggressively.

Walter Pritchard – Citi

Great, thanks a lot.

Operator

Our next question comes from Dan Cummins from ThinkEquity. Your line is open.

Dan Cummins – ThinkEquity

Thank you. Hi, Marty. The – let’s see, two quick questions on federal. It sounds like I further show a number of companies that yeah, the seasonal patterns are all in place everything looks good. It’s a very tough comp. Therefore, in nominal dollar terms, we could be anywhere from plus or minus $1 million to $2 million versus the year ago 3Q. Is that kind of characterized where you guys are looking at it and then I had a question about the pipeline, how much of a proportional contribution is your order built from FireAMP contributing to the total pipeline build? Thanks.

Todd Headley

So, Dan, this is Todd. I’ll answer the first question and flip it over to Tom for the FireAMP answer there. I think you have an exactly right in terms of the magnitude of about $1 million or $2 million, that’s how we think Fed could play out obviously like we said there is doubt, we can turn in leverage, we can pull to the upside of that and then things that potentially we don’t control that could push us to the downside there. So, it goes again back to our guidance philosophy of kind of run-rate down the middle and telling you what we see in feeling good about the ability to go ahead and deliver those results.

Tom McDonough

Yeah. So, Dan, I’ll take the second with respect to firing up, obviously we don’t breakout the dollars or percent of pipeline, but I can tell you that we did see a significant increase in the number of firing up opportunities in Q2. We closed a number of opportunities in the quarter significantly higher than we did in Q1. And we are very pleased with the progress that we are making with that product. Obviously, it’s an enterprise sale like the other technologies that we bring to market, and it will take time for the pipeline as well as close deals to build, but we are very pleased with our progress.

Dan Cummins – ThinkEquity

Anything – can you add anything in terms of whether these are competitive opportunities are you facing off against other types of cloud-based anti-malware, can you give us some color on that?

Tom McDonough

Yeah. Some of them our competitive, others are not, but I can tell you that they come from diverse industries. We closed them in financial services, utilities, biotech and manufacturing in the second quarter.

Dan Cummins – ThinkEquity

Thank you very much.

Operator

Our next question comes from Keith Weiss from Morgan Stanley. Your line is open.

Keith Weiss – Morgan Stanley

Excellent. Thank you for taking my question guys. I wanted to dig in on the product front a little bit. You are talking about a new virtualization offering and I think it was back in 2009 where you guys first rolled out virtual appliances, and if I’m not mistaken, I think is the initial recession was a little bit disappointing. What makes you guys feel better about sort of the market opportunity today or eventually just the virtualization problem being ready to be solved and the market being more receptive to personalized solutions on a go-forward basis?

Marty Roesch

Hi, Keith, it’s Marty. I think what we are seeing – in the early growing with the virtual products that we had, I think you had we were early to market with the technology to some degree, and I think that the market is coming to us in a lot of ways with the technologies that we are offering now. So, I think the people are more ready for it now. They are ready to talk about it and ready to look at different solutions. And really at the end of the today, if you look at the breadth of our solution, one of our big competitive differentiators that I feel that we have is the fact that we bring more scope of capability to the table than our competitors.

When you look at what our competitors are doing across the board, many of them are one block that does one thing. Few of them have sweets, but virtually none of them have a very modern approach to attacking these problems at their fundamental level and having the scope to be able to apply solutions where they are needed. So, you can have network-based devices and that’s great, but people have big virtualized data centers. You’ve got to have virtual capabilities in order to do that. We’re one of the very few providers that can bring the breadth of capabilities that we’ve got to the virtual environment as well as the physical network environment as about.

Keith Weiss – Morgan Stanley

Got it. And then on the mobile side, the FireAMP Mobile, how do you guys foresee for the distribution going on in go-forward basis in that business and – it seems to be in somewhat crowded field of trying to secure Android devices. How do you guys expect to or how are you guys looking to differentiate your product, is it more an enterprise-focused or what’s really going to be the key to making that successful for you guys?

Marty Roesch

I think it is really an enterprise focus. Once again, the nice thing about, if you go with the Sourcefire approach, we have the AMP technology now available for devices, including Android devices, including virtual environments, and now we’re bringing the AMP technologies to our network platforms as well. So, you have the same capabilities leverage across many deployment form factors with unified reporting, unified command and control, which we think our enterprise customers are going to find extremely appealing, despite the fact that the market is crowded if you are buying your solutions from 13 different vendors and you are trying to integrate the information on the back end with a SIM, you are not going to get the same fidelity of protection that you can get with our capabilities.

Keith Weiss – Morgan Stanley

Got it. So, in terms of the distribution for FireAMP Mobile, would you be looking mostly you tie those in with broader sales of Fire?

Marty Roesch

I would expect that it would be a part of broader sales of FireAMP I mean if a customer wants to come in and just take down FireMOBILE individually we’ll certainly service that request, but when we’ve got a big enterprise customers to have this large mobilized BYOD environments out there, we see a lot of opportunity.

Keith Weiss – Morgan Stanley

Got it, nice one. Thank you, guys.

Operator

Our next question comes from Shaul Eyal from Oppenheimer. Your line is open.

Shaul Eyal – Oppenheimer

Thank you for taking my questions. I have two quick ones. Specifically on Europe, can you tell us kind of what countries perform better, which one performs probably a little less than that and also kind of maybe a word about the competitive landscape? Thank you.

Marty Roesch

We don’t really break things out by region, but I can tell you that we did have good growth in all parts of Europe during the quarter. I don’t think we’ve seen the effects that some other companies have seen based on the macroeconomic conditions over there.

Todd Headley

Yes, this is Todd. Just we’re still a smaller player in Europe like Cisco can tell you same store sales for the last 10 years. We’re continuing to cover white space in Europe and in other international locations that we haven’t covered before. And again this get back to something that Tom said pretty frequently which is it’s a time and territory situation. The long we have partners and employees in a territory, the more productive they get.

And since we see expansion in Europe and all the international regions we’re servicing, we’re continuing to invest in there. Again we’ve got our eye on what the German Finance Minister is saying and what’s happening in Greece. But those are things we can’t control, what we can control is our investment and so far those investments are paying off. And to the extent that they continued to do that, we’ll invest into it if we do see a change I think you’ll see us slowdown in investment and look to invest another parts of our business that will bear fruit.

Shaul Eyal – Oppenheimer

Competitively?

Marty Roesch

Competitively its typically it’s the same competitors that we faced over the last three or four years, it’s McAfee, TrippingPoint, we see Cisco and Juniper sometimes. We rarely see IFC, ISS anymore. So, it really hasn’t changed that much the competitive landscape.

Shaul Eyal – Oppenheimer

Got it. Thank you very much for that.

Operator

Our next question comes from Tal Liani from Bank of America. Your line is open.

Ron Zember – Bank of America

Yeah this is Ron Zember on for Tal. Most of my questions were answered. I have a quick housekeeping item of the deals about $500k were there any above $1 million?

Marty Roesch

Yes there were again that’s not – its sad to be provide sometimes we talk about a handful of them being seven figures that was true again this quarter. And I think when you look at our pipeline there are always a number of seven figure transactions that we’re cultivating that could close in any given quarter. And again we really like the progress of our pipeline around really, really big opportunities.

Ron Zember – Bank of America

Okay. Thank you very much.

Operator

Our next question comes from Jonathan Ruykhaver from Stephens. Your line is open.

Jonathan Ruykhaver – Stephens

Hi good afternoon. I’m curious Gartner has commented recently that they see more and more of these Next Gen Firewall deployments. In fact, it’s getting deployed as the replacement to a legacy firewall, but obviously delivering on the control on the IPS functionality, whereas I think in the past I think most of those deployments were architecturally behind the firewall, you can correct me if you think that’s a misleading statement. But I’m kind of curious where do you see the firewall, the FirePOWER Next Gen Firewall getting deployed in that?

Marty Roesch

Hey Jonathan this is Marty. We’re seeing it being deployed primarily behind the firewall and anecdotally that’s what we’re hearing industry wide is the primary method for getting an NGFW deployment in-house is to deploy it behind the existing firewall. And then as customer matures they start looking at the potential for replacing their existing firewall. But this is mostly in the mid-market that we see that sort of thing happening. At the high end the kind of our traditional core market you see people bringing these into augment their existing firewall and capabilities or bringing something like in the Sourcefire case bring an application control to an existing IPS platform.

Jonathan Ruykhaver – Stephens

To augment, it’s been added into the second layer of defense following the stateful inspection firewall and you still have that separate firewall infrastructure in place?

Marty Roesch

Yeah, traditionally at the enterprise level that’s certainly what we are seeing.

Jonathan Ruykhaver – Stephens

Do you think other vendors in this marketplace maybe being deployed differently from Sourcefire?

Marty Roesch

Well, anecdotally what we hear is even at the mid to low end, they are largely being deployed behind existing infrastructures and looking for expansion opportunities beyond that.

Jonathan Ruykhaver – Stephens

Okay. And I’m…

Todd Headley

This is Todd. Gartner has updated some of the recent commentary with regard to the IPS market and the Firewall market and how fast are these markets consolidating and how our customers buying the technology. And I think the takeaway is that consolidation is happening, it’s happening slower than they originally anticipated. And I think they came out with eight different variations of how those two technologies, IPS and Firewall are getting deployed. And I think Marty’s comments on the call were pointed, we have that FirePOWER platform, which allows us to get into any of those opportunities and sell to the need of the customer and now that platform has the flexibility for other solutions, where as Marty indicated again, we have tended to out-scope the competition in terms of the total solution that we can offer.

We’ve been talking for a couple of quarters now about getting our fair share of the significantly larger addressable markets. We think there will be a handful of players that do really well as these markets converge. We anticipate being one of them given our broad set of solutions and there will be some other ones that are successful and probably some of the incumbents who have tended to suffer from innovator’s dilemma are going to give up some of the market share, which is pretty meaningful to smaller guys like us.

Jonathan Ruykhaver – Stephens

Great. Specifically, existing customers that are becoming comfortable enough with your network firewall to actually look to potentially use FirePOWER as the repurchase for the traditional firewall that may have had deployed historically?

Todd Headley

That’s correct.

Jonathan Ruykhaver – Stephens

You do, okay. Okay. And I guess the other question I had is can you just talk about whether the installed base of customers around the FirePOWER IPS product to the activity you are seeing around the license modules control functionality, what kind of lift to ASP does that represent when a customer goes out and buys that?

Todd Headley

Jonathan, this is Todd. We are having a little bit of trouble hearing you probably on a cell phone. So, obviously we are focused on our installed base for the uplift in incremental functionality on that FirePOWER platform that a lot of them have previously bought from us. The ASP lift is about 10% to get the Firewall capabilities. We are still working on pricing for the advanced malware protection that Marty talked about earlier on the call in terms of what the uplift is going to be. But again, you can run it on that FirePOWER platform, so there is not another piece of hardware we need to sell them and it gets turned on by a license key. And so, again, we think we have the flexible underlying platform, the value you are paying from us is still largely based in the best-in-class IPS. We have great application control and we have firewall and we are going to continue to enhance the feature set around all of those technologies running on that platform. So, we think we are positioned extremely well, especially in our customer base, where we are a trusted security provider.

Operator

Our next question comes from Shebly Seyrafi from FBN Securities. Your line is open.

Shebly Seyrafi – FBN Securities

Yeah, thank you very much. So, you talked about growth in the second half in the international segment. Is that a sequential comment as well? Do you expect sequentially to grow in that segment and maybe you can also talk about why you declined sequentially about a million in international in the June quarter?

Todd Headley

So, this is Todd. If you look at our business historically in our international, again, it’s a small business when you segmented out from our overall business. And if you have a large deal happening or not happening in particular quarter can skew some of the results. So, we’ve always said you guys should really look at us on a full year basis and compare it from a growth perspective there. And in that, international grew 38% in 2010 over ‘09 and 28% in 2011 over 2010. Year-to-date were up 70% probably not going to sustain a 70% year-over-year growth model as some of the numbers get again a little bit more difficult from a comparative standpoint, but we feel when all the dust settles, you’re going to see growth in excess of 30% internationally, it could be sequentially were flat, it could be up or it could be slightly down. But again when you look at the whole year we feel really good about the investments we’ve made there and the kind of return we’re getting for those investments.

Shebly Seyrafi – FBN Securities

I just want to make sure are we right, so international 30% or so I think you said federal could be single-digits for the year. What about commercial what are your thoughts on that for the year?

Todd Headley

So, what I said earlier in response to a question, this is Todd, is that the combination of our U.S commercial and international businesses are growing in excess of 30%. So, when you couple that with say single-digit – high-single digits in the fed, you get back to that are comfort in that high 20% growth for the full calendar year of 2012 versus 2011. Exactly where international is going to come out when it’s all set and done, we don’t know exactly yet, it feels like its north of 30%. How far north, it’s going to tell just through execution. And again I think we’ve said we are going to mindful of the macroeconomic back drop and things that our outside, our spend of control that could disrupt our business. And we’re going to invest our resources accordingly. Right now we see great pipeline growth we’re investing in to it, we’re getting yield from that investment on an increasing basis. And we feel really good about the business. But in terms of pinning that down to an exact growth rate it’s just something that we haven’t traditionally done or nor we prepared to do on this call.

Shebly Seyrafi – FBN Securities

Okay. Last one from me, your DSO did increase by seven days according to my calculations maybe you can describe the linearity of the quarter?

Todd Headley

In any quarter especially when you’re selling products, your third month of the quarter tends to be your largest I think that’s been true for Sourcefire since we been a public entity in 2007. I would point out that there was some sequential increase in the DSO, but that we had a pretty low DSO in terms of 78 days in Q1, which is the lowest we’ve had since early 2010. There is two kind of takeaways here, if you look at the average DSOs on that linear calculation we’ve run on average mid-80s up to 90 days. But on a practical basis, we collect within about 60 days from our accounts. And again most of our business from a distribution standpoint is through the channel, so we’re giving them 45 day, 60 day terms and they’re utilizing that full period of time to pay us. It’s just the snapshot calculation that you make at the end of the quarter that causes these numbers to bump up in that like I said mid-80s to 90s. But there is nothing different here than we’ve seen over the last several quarters.

Shebly Seyrafi – FBN Securities

Okay. Thank you.

Operator

This ends our Q&A session. I’ll turn it back to management for closing remarks.

Staci Mortenson

Great. Thank you for the questions. We’d like to thank everyone for your continued interest and support of Sourcefire. And we look forward to speaking with you again next quarter. Have a great evening.

Operator

Ladies and gentlemen, thanks for participating in today’s program. This concludes the program. You may all disconnect.

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