Can New Leadership Unlock Riverbed's Value?

Shares of Riverbed Technology (NASDAQ: RVBD  ) are down 31% so far this year. Not only did disappointing fourth-quarter results immediately send the stock plummeting 22%, investors have now grown concerned about the company's management -- specifically, its ability to effectively synergize the company's $1 billion deal of OPNET.

While Riverbed has done a decent job making the best out of a tough fiscal environment, the company has not been able to reverse the slowing growth in its wide area network -- or WAN -- optimization business. However, despite the recent slowdown, the company still boasts a solid 52% market share, surpassing rivals like Cisco (NASDAQ: CSCO  ) . Nevertheless, investors wanted signs that the company was committed to growth, and last week they got it. But will it matter?

Good addition, but in the wrong area
Last Wednesday, the company announced that Robert Whiteley was joining Riverbed as vice president of product solutions marketing. Whiteley arrives after having spent 10 years at Forrester Research as an industry analyst. Riverbed wants to utilize Whiteley's industry experience since he's been involved in so many customer meetings.

As I've said recently, Riverbed has done a decent job meeting the needs of its customers. Plus, the company has not been doing poorly in terms of overall growth. The problem, however, has been with execution and internal operations. And regardless of what the share price may reflect, Riverbed still posted revenue growth of 17%  year over year and 9% sequentially.

Likewise, product revenue was solid, up 12% year over year, while advancing 9% from Q3. So, this tells me that management is already delivering well to the customer. However, profitability is the problem. All of that growth has not materially impacted the bottom line. Profits tumbled close to 80%. I understand that the deal for OPNET had a lot to do with this. However, there continue to be operational issues that Whiteley will not be able to address.

For instance, operating margin arrived 2% lower at 27% -- missing Street estimates. Plus the company only posted 8% growth in operating income. This is despite advancing gross margin by almost 1% year over year. These (among others) are the reasons why the stock is getting hammered. The company has also posted declining EPS while also hemorrhaging cash flow, which recently dropped 12.44%. So while Riverbed deserves credit for identifying an industry talent like Whiteley, the company has failed to addressed the proper areas of its operation.

Last shot at growth?
If you're still holding shares of Riverbed, you're still betting that the management can put this company back on track. You're also wagering that the company will synergize OPNET to the extent that Riverbed can start posting market-beating performances. While it's certainly impressive that OPNET's application management business is growing at a rate of 30%, I just don't believe that Cisco and F5 Networks (NASDAQ: FFIV  ) are going to make it easy.

F5 has been making moves of its own to solidify its market position by picking off LineRate Systems, a developer of software-defined networking services. What's more, the company also announced the F5 Mobile App Manager, a new hybrid cloud solution for mobile application management. As with Cisco, both of these moves should allow F5 to stunt any momentum that Riverbed might develop. And the fact that Riverbed's stock has been in a free fall indicates that the Street feels the same way.

The good news, however, is that the current weakness in WAN might be temporary, and these rivals may be fighting for a bigger pie. According to research firm Gartner, roughly 80% of end-user traffic will be in WAN by 2014, which explains why Cisco continues to spend aggressively in that area in deals that include $141 million in cash for Cariden , followed by $1.2 billion for Meraki. This means that all Riverbed has to do is hold on to its WAN lead for the next three quarters.

Perhaps this is why Whiteley was brought on board -- to help identify what customers in the WAN market (among other areas) will want going into 2014. If he can do this effectively, it would be a great hire. This all goes back, however, to management and execution. Regardless of how much the market expands, investors will need to have confidence that management can deliver. I don't believe it can.

What of the stock?
Despite the recent punishment, shares are still too expensive. Riverbed's P/E of 44 is four times that of Cisco and almost twice the valuation of F5. That said, the stock is trading at just 10 times 2014 EPS estimates, which is in line with Cisco. This is a situation where an investor with an appetite for risk can profit. But the risks are high.

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  • Report this Comment On April 09, 2013, at 12:48 PM, Wattpuppy wrote:

    I wonder how much of Riverbed's problem is the fact that they are headquartered in CA?

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