posted on: July 24, 2008 | about stocks: RVBD    

Riverbed Technology, Inc. (RVBD)

Q2 FY08 Earnings Call

July 24, 2008, 05:00 PM ET

Executives

Renee Lyall - Director of IR

Jerry M. Kennelly - Chairman and CEO

Randy S. Gottfried - CFO

Eric Wolford - Sr. VP, Marketing and Business Development

Analysts

Ryan Hutchinson - Lazard Capital Markets

Andrew Nowinski - Piper Jaffray

Cobb Sadler - Deutsche Bank Securities

Rohit Chopra - Wedbush Morgan

Kenneth Muth - Robert W. Baird

Presentation

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Riverbed Technology Second Quarter 2008 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 is being recorded today, July 24, 2008.

I'd now like to turn the conference over to Ms. Renee Lyall, Director of Investor Relations. Please go ahead.

Renee Lyall - Director of Investor Relations

Good afternoon and thank you for joining us today on today's conference call to discuss Riverbed's second quarter fiscal 2008 results. Let me take this opportunity to introduce myself. My name is Renee Lyall, and I joined Riverbed on Monday as the Director of Investor Relations. This call is 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 results for its second quarter ended June 30, 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 to the plans and objectives of management for future operations, statements as to management's beliefs regarding the potential size of the markets for their products and market growth and customer demand characteristics, statements regarding expected customer rollout plans and expected traction with service providers and system integrators, statements regarding IP litigation expenses, statements regarding expected purchases under the stock repurchase program, statements regarding future tax rates and statements as to the company's future performance, financial condition 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, expect, intent, plan, belief, target, estimate, and variations of these words and 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 latter date that these comments from today are still valid.

The Risk Factors 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 management will also be discussing non-GAAP financial measures in today's call. Operating results for the second quarter of 2008 that exclude the impact of stock-based compensation, stock-based payroll expense 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 third fiscal quarter of 2008 and full-year 2008 using non-GAAP financial measures. We have 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'd now like to turn the call over to Riverbed's Chairman, President and CEO, Jerry Kennelly.

Jerry M. Kennelly - Chairman and Chief Executive Officer

Thank you, Renee, it's great to have you with us. Good afternoon everyone, and thank you for joining us on today's conference call to discuss our second quarter 2008 results. Revenues for the second quarter were a record $81.6 million, increasing 12% quarter-over-quarter and 51% year-over-year. Our strong top line performance was driven by increased demand from existing customers and another strong quarter of new customer additions.

We improved our operating leverage over last quarter as we increased gross margins and decreased operating expenses as a percentage of sales. As a result, non-GAAP operating income was up 40% year-over-year, and non-GAAP EPS was $0.13 per share, ahead of our guidance. Overall, we believe we delivered a strong performance in a still challenging economic climate, and we are encouraged by a number of key factors.

First, existing customers increased their purchase rate in the quarter. Revenue from existing customers was at record levels in the second quarter, and we believe this trend offers evidence that many of our customers view our technology as critical to their business. As a matter of fact, we met this week with one of the largest service providers, who told us nearly every RPF they see now includes data optimization as a requirement for global networks. Additionally, our services business continues to grow nicely, giving us a solid base of revenues moving forward.

We also had another strong quarter of new customer additions, adding well over 500 customers, including industry leaders across a wide range of verticals. These included one of the largest international apparel suppliers, one of the world's largest defense manufacturers, a large government entity in Asia, and several of the largest technology company in the world. With these wins, we now account 44 of the Forbes Global 100 companies among our customers. Many of which, we believe have multi-year rollout plans for our technology.

It is important to remember that we are still at a very early stage in the development of our market. This quarter was noteworthy because even in a challenging climate, we're seeing a large typically more physically conservative organizations start to buy and the indicator that we are just moving past the early adopter stage for this technology. We believe a number of big customers who've been waiting down the sidelines now appear to view the technology as mature enough to deploy and are initiating purchases. They are deciding that wide-area data services has a very compelling value proposition and that Riverbed offers the best-of-breed solution that can scale to meet their businesses. This is an important evolution of our market and we are seeing it across all geographies.

Given the tougher global economy, we are very encouraged that our overall competitive win rate remains consistently high. We also continue to see a large number of boomerang deals where customers come to us after having trouble with competitor solutions. We continue to benefit from fundamental advantages in our architecture and our first mover advantages in this space. Our patented technology provides a powerful foundation on which we continue to rapidly innovate. This innovation has allowed us to expand our market. Steelhead Mobile was the first major product extension for the company and we were pleased with its traction this quarter.

Sales for Mobile increased sequentially by well over 50% that presented over 4% of product sales in Q2. Just as important, we have now penetrated more than 15% of our customer base with our Mobile product and have seen that it can be a differentiator enabling us to [inaudible] Steelhead orders. This quarter included our first large-scale Mobile deployment by our Fortune 500 company, one of the world's largest manufacturers. This customer is rolling Mobile out to their extranet users, enabling their suppliers to collaborate at much higher speeds. I'll update you in our Mobile initiative, along with other projects at our Analyst Day scheduled for September 15.

On the distribution side, we're making progress on our initiative to broaden our sales coverage by driving more sales from our systems integrator and service provider partners. Our service provider partners now include AT&T, British Telecom, MCNC, Nippon Telephone & Telegraph, Orange, Paknet, SingTel, TELUS, and Telefonica.

In Q2, while the DSI and service provider channels contributed meaningful revenues and we expect to gain traction with these channels over the next year. Regarding our strategic partnerships, today we announced that Riverbed has been accepted in the Microsoft Protocol Optimization Licensing Program. Through this protocol implementation agreement, Microsoft gives Riverbed deeper access to its intellectual property and technology, so that Riverbed can build on its own expertise and success accelerated in optimizing Microsoft Windows and applications over the wide area network.

This partnership not only gives Riverbed access to the full suite of Microsoft OS and application protocols, it also provides us with the license to associated Microsoft intellectual property. Most importantly, this sends a comforting signal to our customers and prospects of our strong relationship with Microsoft. We continue to work on deepening this relationship and hope to announce other agreements with Microsoft in the coming months.

To summarize, we are encouraged by our recent results. Revenues and cumulative customers are at record levels. We saw strong demand from existing customers and continue to add some of the world's largest companies to our installed base. Our strong competitive position unchanged and we continue to lead the market. There is no question that broader market economic conditions still remains challenging, but we think it's proved to be cautious, we entered our third quarter with momentum.

On that note, I would like to turn the call over to our CFO, Randy Gottfried, to go with the financials. Randy?

Randy S. Gottfried - Chief Financial Officer

Thanks Jerry. In the second quarter, total revenues increased 51% year-over-year and grew 12% sequentially to $81.6 million. We do not have any 10% customers in the quarter. Sales of Steelhead Mobile increased as a percentage of revenue and in absolute dollars, generating about $3 million of revenues in Q2.

Product revenue from new customers represented 38% of the total in Q2, down from the 43% we achieved in Q1. 62% [ph] of our product revenue or $39 million came from existing customers, this compares to $33 million last quarter. About 91% of our revenue came from indirect channels in Q2, with remaining 9% coming from direct sales. Approximately 58% of our revenue was generated in the U.S. with the remaining 42% coming from outside the country. Services revenue increased 115% over the second quarter of 2007 as we continue 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 costs and expenses, I'm talking about non-GAAP numbers that excludes stock-based compensation and stock-based payroll taxes. Product gross margins came in at 77% in Q2, up from 76% in Q1. Improved product gross margins were primarily the result of a better product mix, including a higher Steelhead Mobile license contribution.

Service gross margins came in at 70% in Q2, up from 67% in Q1. Together, they resulted in a 75% combined gross margin, which was within the expected range we discussed on last quarter's call. We added 40 employees in the quarter and finished with 761 employees at the end of June.

Sales and marketing expenses increased in absolute dollars and were flat as a percentage of revenue at 35% in Q2. R&D also increased in absolute dollars and decreased as a percentage of revenue to 14%. G&A expenses increased in absolute dollars this quarter and decreased to about 9% of revenue. Expenses related to our IP litigation were a big component for the G&A increase in Q2 and reduced our EPS by over $0.01 per share. Overall, our non-GAAP operating margin rose to 17% this quarter, up from 14% in Q1.

Our non-GAAP tax rate was 35% in Q2. Our GAAP tax rate was 163%. The higher Q2 GAAP tax rate was driven primarily by timing differences between GAAP and common taxable income, such as the treatment of stock-based compensation and IP litigation expenses. Assuming a number of variables, long-term we expect those timing differences to even out and result in much lower long-term rates.

Due to the complexity of GAAP tax accounting rules, the GAAP tax rate may continue to be volatile in the near term. Q2 non-GAAP, pre-tax income was $15.3 million. Non-GAAP net income was $9.9 million or $0.13 per share. On a GAAP basis, we had a pre-tax income of $1.4 million, but a net loss of $0.01 per share due to 163% tax rate. We finished June with $269 million of cash, cash equivalents, and short-term investments.

Moving down to balance sheet. We ended the quarter with $45 million of accounts receivable, which represents 50 days sales outstanding, down from 52 days at March 31. Inventory totaled $13 million at June 30, up from March 31. Deferred revenue, current and long-term portions increased 16% from Q1 to $44 million at quarter-end. Most of our deferred revenue derives from maintenance and support contracts.

Total equity was $281 million at June 30. We purchased about 800,000 shares or a 12.5 million of Riverbed stock under the stock buyback program we announced last quarter. We expect to continue purchases under our program in Q3.

Looking forward, here are some guidance as we go into the third 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 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.

Overall, we're cautiously optimistic coming off a strong second quarter. The market remains challenging, but our pipeline, customer base, and services revenues are all growing. Balancing our performance coming out of Q2 and the current macroeconomic conditions, we expect a modest sequential growth and a seasonally softer third quarter in the range of $83 million to $85 million, with non-GAAP EPS of approximately $0.14 per share for the quarter. This projection incorporates approximately $1.5 million in expenses related to the IPO litigation and a non-GAAP tax rate of 36%. We are assuming fully diluted share count of 75 million shares.

Looking further out, we're raising our full year guidance based on our Q2 performance. We're currently expecting revenues in the range of $329 million to $335 million and non-GAAP earnings per share of $0.53 to $0.55 per share for the full year.

With that, let me turn it back over to Jerry.

Randy S. Gottfried - Chief Financial Officer

Thank you Andy. To summarize, we had a strong second quarter, especially in this environment. With 44% of the Forbes Global 100, we are adding larger and typically more physically conservative organizations to our customer list particularly in a new phase in our market, while we remain cautious in the current global economic environment, we're encouraged by a consistently strong win rate and new customer growth. Of all that, we have planned, we're excited about the long-term future of the company, we look forward to sharing our vision with you at our Analyst Meeting on September 15.

With that said, Eric, Randy and I would now be happy to answer any questions that you may have. Our operator Nicole, you can now open it up for questions.

Question and Answer

Operator

Thank you sir. [Operator Instructions]. Our first question is from the line of Ryan Hutchinson with Lazard. Please go ahead.

Ryan Hutchinson - Lazard Capital Markets

Good afternoon guys, nice to see the recovery here. Couple of questions. First, can you guys talk about the overall closure rates in the quarter, perhaps the total deals that slipped as well from March to June, and whether or not those recovered in the quarter? And then I have a follow-up

Jerry M. Kennelly - Chairman and Chief Executive Officer

Sure. I'll take that first part. In general, yes, some of the deals that had slipped from Q1 closed in Q2. As we mentioned coming out of the first quarter, in general what we saw was that sales cycles had lengthened given the macroeconomic climate. So, consistent with what we expected sales cycle continue to be longer than we saw in 2007. Likewise, overtime deals that may have otherwise closed in Q2, will go into Q3 as well.

Ryan Hutchinson - Lazard Capital Markets

Okay. And then as it relates to the guidance here, does the... does that reflect basically the same percentage of deals in the pipeline getting closed as it did in the June quarter, or has that methodology gone up or down pretty consistent here as we move into the third quarter?

Jerry M. Kennelly - Chairman and Chief Executive Officer

I think that is pretty similar. In general we sort of learned from the experiences earlier in the year, and that sort of revised methodology I think played out well in Q2. And we think we're thoughtful going into third quarter as well.

Ryan Hutchinson - Lazard Capital Markets

Okay. And then finally competitive wise, may be for Eric, with the upcoming RiOS [ph] release slated for… my understanding is, later this month, just... can you just talk to that, your view on the competitive dynamics, and specifically feature wise, does that bring one of your key competitors up to par with you guys or just to provide a little bit of color there, it'll be helpful? Thanks.

Eric Wolford - Senior Vice President, Marketing and Business Development

Sure. I'll give you a couple of facts from this quarter. First, with regard to the new releasing [ph] of the internal input is Davis. We did have the opportunity to compete with it several times this quarter, it was in its beta form admittedly, but we... and every time we went head-to-head with it, we were able to win against it. It is in its beta form but it looks to us like every summer, or every six months or so there is a new release and it is touted as something that is going to be very impactful for Riverbed, and it looks to be like more of the same, the fundamental core issue still seem to exist. Overall, our competitive win rate, relative to Cisco, they're definitely are most dominant or the most predominant competitor that we run into, but our win rate has stayed consistent at its historical norm. So, as we look at the facts, it looks like it is not having a big impact.

Ryan Hutchinson - Lazard Capital Markets

Great, thanks. Good luck.

Jerry M. Kennelly - Chairman and Chief Executive Officer

Thanks Ryan.

Operator

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

Andrew Nowinski - Piper Jaffray

Good afternoon, and great quarter guys.

Jerry M. Kennelly - Chairman and Chief Executive Officer

Thank you.

Andrew Nowinski - Piper Jaffray

Just a quick question, the channel sales increased pretty substantially this quarter, is any of that attributable to the BlueCoat acquisition, I guess you guys pick up any new channel leads from that turmoil?

Eric Wolford - Senior Vice President, Marketing and Business Development

Yes, so... there is no question that as sort of anticipated, that merger does create instability in the Packeteer base. And so I wouldn't characterize it as a big impact on the results this quarter, because what we have experienced this quarter is an increasing of funnel opportunities as many of those Packeteer customers start shopping, and start looking for alternatives. So, yes, it definitely has had an impact on our sales activity and our sales cycles and opportunities, but I would view it more as a funnel increase rather than as a bottom line increase for this quarter.

Andrew Nowinski - Piper Jaffray

Sure, great. Then just one more question on... with the proliferation of video and executive messages and training, just wondering, are you guys seeing strong demand for all the software that you incorporate into your RSP platform?

Eric Wolford - Senior Vice President, Marketing and Business Development

Yeah. So, this is Eric again. Definitely video is more of interest to customers than it was a year ago, there is no question about that. For us, it has not hit the point of being generally demanded across, broadly across the market. We definitely see some very large customers that have interest, and more than just interest, are looking to do something. So, our way of addressing it in RSP is something that is very appealing to them and kind of confirms that that's one of the things we should have in RSP, but it is by no means one of the top three or four things that people are looking for from WAN acceleration.

Andrew Nowinski - Piper Jaffray

Got it. Okay, thanks guys.

Jerry M. Kennelly - Chairman and Chief Executive Officer

Thanks, Andrew.

Operator

Thank you. Our next question is from the line of Cobb Sadler, Deutsche Bank. Please go ahead.

Cobb Sadler - Deutsche Bank Securities

Hi, thanks a lot, guys. I was wondering about your installed base. It sounds like it came back pretty heavy. What do you think is the dynamic there, what do you think the percentage increase from your existing customers?

Jerry M. Kennelly - Chairman and Chief Executive Officer

Hi Cobb, absolutely [ph] on one of the videos of our model is that, we are not sort of... big deal depended on new customers, we have this annuity run rate from our existing customers who buy quarter in quarter out over time as they do the deployments and so in regard with Q2 we saw the U.S. comeback stronger which have been a little weak in Q1 and just a general... where people have to pull back they don't, this is not a function they want to pull back on and so we were able to... people were able to keep the deployments over time that they had planned and budgeted. If they had to pull budget, it seemed to pull them other places and keep the WAN acceleration funded.

Cobb Sadler - Deutsche Bank Securities

Okay it sound good. And then question on deferred revenue way up that looks good. What... could you break that out services versus products, is there a lot of product in there or was it service contracts?

Eric Wolford - Senior Vice President, Marketing and Business Development

The vast majority our services for contracts, typically that get advertised over a year.

Cobb Sadler - Deutsche Bank Securities

Okay great. And then Mobile, probably looks like it did well, but that's still pretty sticky application, are you seeing any truly competitive products out there, are you guys kind of standing alone with the Mobile Steelhead still, that's the last one, thanks a lot?

Jerry M. Kennelly - Chairman and Chief Executive Officer

There's no question Blue Coat has a product out there that they don't charge for and Cisco is reselling the products from ICT, so we do run into those and have competed with those rather extensively but I would say our win rate in Mobile sales is more dominant than our win rate is in Steelhead appliance sales. So we really feel like we have a very strong position in terms of product advantage there. Anyhow we have planted a lot of seeds with 15% of our base having purchased Steelhead Mobile controller which is just one box with 30 licenses and we still are anticipating and eagerly anticipating kind of the blossoming of all of those... all of the seeds.

Cobb Sadler - Deutsche Bank Securities

Okay, and then lastly on the new datacenter product if you can talk about that I mean, how much have you, you probably can't about it, but how much have you baked in for the year, is there a substantial expectation for that product back half of this year. Thanks a lot.

Eric Wolford - Senior Vice President, Marketing and Business Development

Yes, so it's a good point, so on our analyst day we'll go into... we'll definitely go into more detail about the product and disclose more specifically what it is, but just to be clear there is no revenue in our 2008 plan associated with this product. The revenue we expect to take would be in 2009, we are getting ready to go into Alpha and we'll tell you more on the 15th.

Randy S. Gottfried - Chief Financial Officer

And Cobb, we've never described that as a 2008 revenue, never not once, it's always been 2009. so it's not a change.

Cobb Sadler - Deutsche Bank Securities

Got it. Thanks a lot.

Operator

Thank you. Your next question is from the line of Paul Mansky. Please go ahead.

Unidentified Analyst

Yes It's actually John calling in for Paul. A couple of questions if I can, one, can you give us any color on the vertical exposure, any over ten, and can you rank them order them at all?

Randy S. Gottfried - Chief Financial Officer

Sure. In general the great thing about our business is always been how diversified our customer base is. Generally have about seven verticals there about 10% of revenue each plus or minus and about six more that are about 5% plus or minus every quarter with some variability of every quarter. This quarter there wasn't a whole lot different manufacturing and government may be were a little bit higher than normal this quarter by a few points but again no dramatic change really in any of the categories.

Unidentified Analyst

Okay, then just Steelhead Mobile, nice pick up and you talked about it already but any further color on how the order kind of process works there. How many... can you give us sort of, how many customers given pilot and what the program is to ramp to significant revenue or something like that. Just to trying to think about how we should think about it going forward?

Eric Wolford - Senior Vice President, Marketing and Business Development

Yes, sure. This is Eric again John, so what usually happens the motion is, 90% of the time motion is the customer purchase... evaluates they try that if you like it, then purchase a Steelhead Mobile controller, it's not a very expensive item, it's $10,000, $12,000 and they get 30 user licenses. And that's, I would say the vast majority of our sales and revenue. And then what we try to do is follow-up to get them to do the larger deployment or increase their use into other locations. Now usually takes them a while to go through some testing and change... and convert to doing a big order. Now we did see this quarter for the first time where we saw some major follow-on orders and that's where we pointed out that we were... we were pretty pleased with that because it's kind of proving in the model. We need a little more time to see that that becomes a pattern and continues, but it is the follow-on orders for us that are very appealing, obviously because they've already, it's a pretty margin rich follow-on order.

Jerry M. Kennelly - Chairman and Chief Executive Officer

And there are a number of quite large follow-on orders in the pipeline for the balance of '08 and in 2009.

Eric Wolford - Senior Vice President, Marketing and Business Development

And the pipeline is growing nicely, so for the products.

Jerry M. Kennelly - Chairman and Chief Executive Officer

But you have the product as you know, [inaudible] direct attributable Mobile revenue, because there is a lot of pull through, so someone may spent $50,000 for Mobile, it's part of $600,000, $1 million buy, total buy, but the Mobile was the thing that caused the $1million buy, so it has more important than just the directed attributed revenue.

Eric Wolford - Senior Vice President, Marketing and Business Development

It's a great differentiator, John.

Unidentified Analyst

Great. Thanks a lot.

Operator

Thank you. Our next question is from the line of Fahad Masood [ph]. Please go ahead, with UBS.

Unidentified Analyst

Thank you for taking my question guys. My question is really around OpEx. I'm looking, this quarter it seems like after three quarters in a row you've grown revenue ahead of OpEx. And if I go back to March, '07 timeframe, we can't understand predicament. So I'm just kind of curious if maybe you can provide some color on if you're managing OpEx in line with what you're seeing out in the market or do you think that investments you've made over the last three quarters are sufficient to support the growth going forward, maybe you can provide some color on that.

Jerry M. Kennelly - Chairman and Chief Executive Officer

Sure. In general, as we look at what we're spending now, we're still growing, we're still investing in distribution and expanding our capacity in geographic coverage. We're also investing in the product pipeline, which we think is robust. So, still continue to spend money. We're balancing that against profit in the macro economic climate, and 2007 was sort of an abnormal time period for a lot of reasons, in the first half of the year, especially 2007, revenues sort of over took our ability to spend. So some of the statistics really aren't were... sort of a little distorted. As we go into 2008, we are looking at a number of sort of high ROI opportunities to spend our money. And that's just continue to be things that we can spend money on that we think have a pay off and a reasonable future. So we're trying to balance all that against what we think is a pretty big, large long-term opportunity.

Unidentified Analyst

Okay. And just maybe, just to follow-up on the business model, in terms of gross margin there, operating margin profile, what is your long-term view especially now that you're trying to see some traction from Steelhead Mobile, can you may be just [inaudible].

Jerry M. Kennelly - Chairman and Chief Executive Officer

Sure. I mean long-term our operating model looks in the mid-20s for our operating margin target. On the gross margins, mid upper 70s is something we talked about probably for a while. In the near-term, while Mobile is still a relatively small number in the puzzle, the relative range for gross margins are 74, 76 that we came in right mid point of that in Q2. So over time, our goal is to have Mobile be a bigger contributor, we get the benefit some of our boxes have a slightly higher margin component to it that would help that over time, but it will take a while.

Unidentified Analyst

Thank you.

Operator

Thank you. [Operator Instructions]. Our next question is from the line of Rohit Chopra with Wedbush Morgan. Please go ahead.

Rohit Chopra - Wedbush Morgan

Yes, I have a few questions, guys. Did you mention the size of the deals, are they going up, down, flat, where are they this quarter [ph]?

Jerry M. Kennelly - Chairman and Chief Executive Officer

They were pretty much in line. We usually have a handful of million dollar plus deals, and then a book of our transactions are between $20,000 and $100,000. And then, some bunch of multi-hundred thousand dollar deals and then a handful $3 million, $4 million, $5 million, $6 million deals. So this quarter looked exactly like a normal quarter at Riverbed.

Rohit Chopra - Wedbush Morgan

Okay. So, this is not the same as last quarter, it's a little better than last quarter, that's what you're saying?

Jerry M. Kennelly - Chairman and Chief Executive Officer

Slightly better than the last quarter, yes.

Rohit Chopra - Wedbush Morgan

Okay. And the other thing is, long time ago you mentioned a number of deals which are competitive and the number of deals which are not competitive that you guys go to, has that ratio changed?

Eric Wolford - Senior Vice President, Marketing and Business Development

Yes, it's... it's sort of in the same range, which is anywhere from, say, high 20s to 40% is not competitive, and so it's still in that range. If you ask our sales guys on every big deal, of course we're always competing, but when you look at the market in total, I think there is... it's not yet reached distribution saturations.

Rohit Chopra - Wedbush Morgan

Okay. And then, you haven't mentioned HP in a while, and I just wanted to see if there is any change in that relationship, I know they are buying a lot of your equipment. Really just seems like it would be a good channel especially with EDS, and I just wonder if there is any change there?

Jerry M. Kennelly - Chairman and Chief Executive Officer

So HP is a channel for us.

Eric Wolford - Senior Vice President, Marketing and Business Development

HP Services.

Jerry M. Kennelly - Chairman and Chief Executive Officer

HP Services. They're is a little bit of geography, they are very strong in Europe, they are pretty good in Asia, and then probably less impactful in the U.S. EDS is a good channel for us, and particularly in the government sector. So, we haven't seen any impact on EDS in terms of interaction due to the HP acquisition yet, but all-in we expect the acquisition to be a positive thing for us.

Eric Wolford - Senior Vice President, Marketing and Business Development

Sure, well, we kind of put that into that... we talk about service providers and systems integrators as a channel that we are investing a lot in, because we think they are very important, HP Service is a great example of a company in the systems and integrator category.

Rohit Chopra - Wedbush Morgan

And then my last question is on the international side. Is there a specific country or region where you see a little bit more traction than another, like where the message is resonating a little bit more?

Jerry M. Kennelly - Chairman and Chief Executive Officer

Internationally we tend to really be favored by the really giant companies... and countries, and so I'd say Northern Europe, Nordics, the U.K. of the Nordic countries, Germany, Switzerland, those areas are very strong for us. Southern Europe is still adopting but there seems to be a lot of opportunity there. In Asia, Australia, New Zealand are particularly strong for us and what we call Southeast Asia, which is Singapore, Malaysia, Thailand, the Philippines [inaudible] area we do quite well in.

Rohit Chopra - Wedbush Morgan

Okay. Thanks guys.

Operator

Thank you. Our next question is from the line of Sanjiv Wadhwani from Stifel Nicolaus. Please go ahead.

Unidentified Analyst

Hi guys, this is Deepak for Sanjiv. You guys had good results for the U.S., I guess sequentially up about 18%, and I guess some of that is the deals slipping from Q1. But I was just wondering like this current quarter pipeline wise for the U.S., I know it's only like three weeks into the quarter, but how does that look so far?

Eric Wolford - Senior Vice President, Marketing and Business Development

This is Eric. So, we just had our quarterly sales kick-off pipeline review we did it in Denver two weeks ago and I sat through most of the regions and looks quite good. The [inaudible] were up, they will be developing their pipeline, kind of rebuilding them for 2008, and [inaudible] were good, pipeline were strong and people were optimistic. So, that's a good for us and we sort of take that and handicap it a bit for the economy and try to come up with guidance that reflects their enthusiasm but also macro factors and try to guide appropriately.

Unidentified Analyst

Okay, and in terms of investing in additional sales, headcount, any color on that?

Eric Wolford - Senior Vice President, Marketing and Business Development

Actually, there's two areas that we are investing in right now in sales capacity, one is there is clearly some discoverage issue, so we try to fill those gaps as best we can, areas where we have no coverage or insufficient coverage. But just as important, focusing on the systems integrated service providers base, because we distinct with those... that's a longer pay off, but again those partners are working with some very big end users, and therefore have some huge revenue potential if we can make it successful, but those are also partners that... they're like big ships that just take a while to turn and a little bit, but we're devoting a lot of resources to make them successful.

Unidentified Analyst

All right, thank you very much.

Jerry M. Kennelly - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you, and the final question comes from the line of Ken Muth with Robert W. Baird. Please go ahead.

Unidentified Analyst

Hi this is James Holcomb [ph] on for Ken. Just touching back on the kind of the geographic trends, last quarter Europe you described is still being quite bullish. I just want to get an update from you, you're starting to see, sort of similar trends longer sales cycles scope down in the U.S.?

Eric Wolford - Senior Vice President, Marketing and Business Development

Yes, Europe is still upbeat, the pipeline is strong. If you look at the results this quarter, International grew at 61% while the company in general grew 51%. So International grew 10 points faster [ph] than a company as a whole. That being said, there is... we're not... [inaudible] of the macro trends and it's also the summer season, particularly in Europe and a lot of folks will be in the south of France, so the month of August and so, that's encompassed in our guidance.

Unidentified Analyst

Okay. And then just quickly on the Microsoft protocol optimization. What does it take to get access to this intellectual property, are the competitors getting access also, and then how incremental is this to perform, given you've been optimizing Microsoft protocol for a long time?

Eric Wolford - Senior Vice President, Marketing and Business Development

Yes, that's really a good question. So the biggest motivation for us in doing this particular agreement with Microsoft was customer confidence and customer comfort, right. We want our customers to know that we have a good... we've had, we have and we will have going forward, a good working relationship with Microsoft. Getting into the technical details of this particular agreement, we have... prior to this agreement we have had access to the protocols, Microsoft makes them available on MSDN, the Microsoft Development Network, so the protocols we have had access to for a while now. What this does is, this gives us the blessing of Microsoft to implement products based upon those protocols. And so actually, in terms of... does this make our product better. Actually our product, we have done five years of R&D on addressing Microsoft protocol issues and so all of those issues are addressed in the product today. This, the main thrust of this particular relationship is to make sure we have a good working relationship with Microsoft and most importantly in kind of inspire customer confidence and comfort and prospect confidence and comfort.

Jerry M. Kennelly - Chairman and Chief Executive Officer

And we think there is a long-term relationship with Microsoft that will get better and be more beneficial to both parties and this is kind of a good foundation for that as we keep going with them in the future. Okay, great, well thank you. We thank you for being on the call today and appreciate your support...is that Nicole. And we look forward to updating you our progress at the analyst day on September 15. Thanks.

Operator

Thank you ladies and gentlemen. This concludes the Riverbed Technologies second quarter 2008 Conference Call. We thank you for your participation and you may now disconnect.

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