Riverbed Earnings Preview: Will Modesty Pay Off?

It's been a rough-and-tumble several quarters for WAN optimization specialist Riverbed Technology (Nasdaq: RVBD  ) . Shares had promptly plunged 24% last summer on a slim 1.5% revenue miss relative to what the Street was looking for.

Overall, the report was no cause for concern, yet the stock has continued to languish ever since and still hasn't fully recovered to those levels. The two earnings releases since then received mixed receptions, with shares jumping after the third-quarter release only to give it back in the fourth.

RVBD Revenues Chart

RVBD Revenues data by YCharts

Heading into the first-quarter report tomorrow, the company's own guidance -- the same one that triggered a sell-off -- calls for $183 million to $187 million in revenue and earnings per share between $0.19 and $0.21. The Street is now looking for $186.5 million in sales, with profit of $0.20 per share.

Keep in mind that relative softness in Riverbed's crystal ball is primarily related to the transition to a new family of Steelhead products. During the last conference call, CEO Jerry Kennelly said, "As we work through the temporary disruption related to product transition, we look forward to accelerated growth in the balance of the year as we benefit from the major new product introductions."

The midpoint of Riverbed's guidance would represent 13% growth over last year's $163.6 million, and CFO Randy Gottfried said the company expects the second, third, and fourth quarters to each put up growth between 18% and 22%, which should lead to a top-line increase of 17% to 20% for the full year.

Shares are locked and loaded to pop in the event of a strong quarter, as short interest has been building in the wake of last quarter's release.

Metric

1/31/12

2/15/12

2/29/12

3/15/12

3/30/12

Short interest (shares) 3.9 million 5.9 million 5.5 million 6.9 million 7.9 million
Short interest (% of outstanding) 2.4% 3.7% 3.5% 4.4% 5%

Source: Nasdaq.com.

If Riverbed proves to have been playing its numbers modestly and puts up a blowout quarter, these bears will be sent packing and might help fuel a strong rally.

WAN optimization is an increasingly important field, and notably one that networking giant Cisco Systems (Nasdaq: CSCO  ) has been a relative laggard in, compared with its other bread-and-butter segments like switching and routers -- 39.5% and 22.8% of product sales last quarter, respectively. Cisco brags about its market-share leadership in other networking areas but notably omits WAN optimization from the list, while Riverbed owns more than half of the market globally.

Rival WAN optimizer Blue Coat Systems was recently taken private, which was probably the happiest possible ending for its public shareholders, as the company was flailing wildly. While that company's last earnings release as a public company technically beat expectations, we're still talking about a bottom line that shrank by 62%.

Riverbed also counts Citrix Systems (Nasdaq: CTXS  ) as a competitor, but Citrix even concedes that Riverbed has an advantage in its sole focus on WAN optimization. Besides, Citrix is much more concerned with its core virtualization offerings, anyway.

Riverbed's focus on leading its niche market is paying off, despite the turbulence that shares have seen over the past three quarters. Can shares ever reclaim the all-time highs topping $44 that they reached more than a year ago? I think so, since the company continues to dominate an increasingly critical sector that benefits from the cloud.

Shares are pricey at 72 times earnings, so you can expect a fair share of volatility as a high-multiple stock. Speed bumps related to expected product transitions give long-term Fools an opportunity as short-term investors fret over the next fiscal quarter, but Riverbed's long-term growth story remains soundly intact.

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Fool contributor Evan Niu owns shares of Riverbed Technology, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Riverbed Technology and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Riverbed Technology and writing covered calls on Riverbed Technology. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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