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Or is it? For the most part, Riverbed delivered in Q2:
- Product revenue once more grew faster than overall revenue, up 38% versus 35%. That's good news. Box sales continue to drive this growth story.
- Both gross margin (up 70 basis points) and returns on capital (up to 8.5% from 6.9%) showed noticeable improvement year over year in Q2, which suggests both pricing power and smart use of capital resources.
- While cash from operations declined, the key detractors were higher prepaid expenses and a sharp decrease in the company's net benefit from stock-based compensation. Again, these just strike me as good management choices that mean nothing to long-term shareholders. Investors will eventually enjoy higher cash flows resulting from growing demand for Riverbed's Steelhead line of WAN Optimization products, which add speed by eliminating redundancies and unnecessary steps in delivering data.
More than anything else, Riverbed fell because revenue came in short of management's own expectations. CEO and co-founder Jerry Kennelly could have shifted the blame to a lousy economy. Instead, he admitted that -- in Europe in particular -- the sales team could have executed better.
Color me thrilled. Frankness bespeaks courage. In this sense, Kennelly isn't afraid to admit a mistake because, as a co-founder, he's personally invested in fixing it. This same dynamic explains why no one can tell from Apple's (Nasdaq: AAPL ) earnings that Steve Jobs is on medical leave. It's also why Reed Hastings personally responds to Netflix (Nasdaq: NFLX ) critics. Owners take good returns, and good management, personally.
In sum, nothing in Riverbed's report or management's comments leaves me concerned. Sure, Cisco (Nasdaq: CSCO ) is a tough competitor and will do its best to beat Riverbed, but Juniper Networks (Nasdaq: JNPR ) is struggling, and Akamai Technologies (Nasdaq: AKAM ) is a partner for accelerating apps as they travel from inside a company network across the cloud. All signs point to a large and growing need for the sort of WAN optimization Riverbed provides.
Now it's your turn to weigh in. Does this sell-off reflect a disruptive shift, or a buying opportunity? Please vote in the poll below, then leave a comment to tell us your thoughts about Riverbed's business. You can also add Riverbed Technology to your watchlist for up-to-date analysis on the stock as soon as it's published.