Why Riverbed Rocked Earnings This Week

Hear that sound? That's the sound of sweet relief for Riverbed Technology (Nasdaq: RVBD  ) investors. The WAN optimization specialist put up strong, second-quarter results and, more importantly, solid guidance last night. Today's boost is a nice break from the demoralizing sell-offs that investors awoke to for the past two consecutive earnings releases.

Good morning, sunshine
Investors enjoyed a 31% pop this morning along with their cup of Joe. Total revenue rose 9% to $199 million with adjusted net income of $37 million, or $0.23 per share. The company had previously acknowledged that it could have improved execution and this quarter that's exactly what it did.

CEO Jerry Kennelly said management is pleased with the progress made on that front and that Riverbed has refined its sales approach. The broad sales force is honing in on the core products, Steelhead in WAN optimization and Cascade in network performance management, or NPM.

The Stingray business with application delivery controllers, or ADCs, is ramping up nicely and ahead of expectations. That segment has now crossed $20 million in sales in three quarters. Riverbed also announced a partnership with Juniper Networks (NYSE: JNPR  ) where Juniper will license Riverbed's ADC technology for $75 million. Juniper will offer an integrated data center solution that taps into Riverbed's ADC software. This revenue wasn't included in the second quarter, but will instead be recognized in the third.

The breakdown
The core Steelhead WAN optimization business remains in the driver's seat, representing 90% of total revenue in the quarter. The NPM business was 7% of sales while the growing ADC segment was only 3%. Total product revenue grew by 11% to $129.4 million, an encouraging reacceleration when sequentially compared to the 4% gain last quarter. Support and services revenue jumped 29% to $69.1 million.

Even as macroeconomic concerns continue to weigh on the broader IT sector, particularly those in Europe, Riverbed posted a 29% increase in Europe, Middle East, and Africa, or EMEA. Asia Pacific revenue also grew 23% to $29.3 million, while the bulk of sales remains in the Americas at 59% of the top line.

Riverbed remains heavily dependent on indirect distribution channels, with 95% of sales sold through third-party resellers. Arrow Electronics (NYSE: ARW  ) was the largest at 17% of sales, on par with the first quarter.

The guidance game
Third-quarter guidance also came in better than expected, with revenue expected between $214 million and $219 million. Gross margins aren't likely to change, and operating margin should be right around 26%. The bottom line is expected between $0.25 and $0.26 per share.

Both top and bottom line forecasts are ahead of what the Street was calling for. Analysts were perched on $209.7 million in revenue and $0.24 per share in profit. After that, the fourth quarter is typically the strongest due to seasonal factors, with margins expected on the same level as the third quarter.

This time around, Riverbed played the guidance game -- and won.

On the books
The company still has a strong balance sheet, with $550 million cash and investments and no debt. Riverbed is deploying this cash in stock repurchases, recently doubling the total authorization to $300 million. Riverbed repurchased approximately $100 million in stock during the second quarter, with about $164 million remaining in the program.

Deferred revenue rose slightly to $173 million, with most of this consisting of prepaid support contracts. Deferred product revenue is expected to jump next quarter, since Juniper prepaid most of its $75 million upfront in July and this revenue will be recognized over the next four years, starting next quarter.

I can see clearly now
The case for Riverbed's transition into becoming a multi-product company is gaining legs, as its expansion into other networking niches appears to be paying off with the NPM and ADC businesses both growing. Still, F5 Networks (Nasdaq: FFIV  ) will put up quite a fight defending its leadership in ADCs.

It will be a long and hazardous transition, especially to justify Riverbed's valuation, but this quarter is a step in the right direction.

There's another technological revolution happening as we speak in big data, and this company is poised to profit. Grab a copy of this special free report to learn all about the only stock you'll need.

Fool contributor Evan Niu owns shares of F5 Networks, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Riverbed Technology. Motley Fool newsletter services have recommended buying shares of Riverbed Technology and F5 Networks. Motley Fool newsletter services have recommended creating a stock position in Riverbed Technology. The Motley Fool has a disclosure policy. We Fools may not 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.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1957788, ~/Articles/ArticleHandler.aspx, 8/30/2014 4:20:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement