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Riverbed Technology, Inc. (RVBD), Cisco Systems, Inc. (CSCO): This Network Company Is a Buy From Here

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After Riverbed Technology, Inc. (NASDAQ:RVBDreported quarterly earnings that included a less optimistic outlook than consensus, investors sold off shares in the company. The Wide Area Network (“WAN”) optimization solutions provider suffered a weak quarter for two reasons: (1) its expensive OPNET acquisition and (2) its reliance on government spending. With shareholders now holding losses, it is time to reset expectations and to consider accumulating Riverbed shares.

What happened

Riverbed Technology, Inc. (NASDAQ:RVBD) reported $255 million in revenue, a 28% increase (year-over-year) in the second quarter. Earnings were $0.22 per share. The recently acquired unit, OPNET, was a drag on results. Sales were $2 million below the guidance provided by the company.

Riverbed Technology, Inc. (NASDAQ:RVBD)OPNET makes Application Performance Management (“APM”) solutions for networks. Riverbed Technology, Inc. (NASDAQ:RVBD) bought the company in December, 2012 for $1 billion to add to its product offerings. Riverbed wanted to offer solutions beyond core optimization and acceleration solutions, also known as Network Performance Management (“NPM”). With OPNET, Riverbed says it can sell “application and network performance in a single portfolio of products.”

Investors punished Riverbed Technology, Inc. (NASDAQ:RVBD) after results were reported. Prior to the results, Riverbed traded close to $18, because investors believed incorrectly that the integration of OPNET would be complete. Riverbed said there is at least another quarter before the integration of the sales team is complete. This implies that sales for OPNET will not yet operate at its optimum level until later this year. On its conference call, Riverbed said it will be between 6 and 9 months before the integration of the sales team is complete. OPNET has 700 employees, while Riverbed has 1800 staff.

Bright spots

Riverbed Technology, Inc. (NASDAQ:RVBD) reported a 44% increase in total sales for support and service. This was due largely to the OPNET acquisition. As the integration of the unit is completed by the end of the year or early next year, service revenue should be even higher too.

Geographically, sales grew in all locations. America is especially important, since 63% of sales come from this geography.

Product gross margin was healthy, at 80.5%.

Balance sheet analysis

Riverbed Technology, Inc. (NASDAQ:RVBD) has nearly $2 billion in assets, and $519 million cash. The $3.18 in cash per share is nearly equivalent to the remaining debt outstanding.

Outlook

Analysts believe that as much as 80% of end-user traffic will be WAN. Riverbed Technology, Inc. (NASDAQ:RVBD) has a suite of products to help customers manage their network infrastructure. The company wants its technology to be deployed in every data center. By selling performance management products to as many channels and partners as possible, Riverbed hopes to achieve this long term goal.

Riverbed Technology, Inc. (NASDAQ:RVBD) expects revenue will rise between 21% and 23% year-over-year.

Risks

18% of revenue comes from the government sector. The current quarter could have higher risks, since sequestration could limit funding related to WAN optimization. If this happens, then Riverbed Technology, Inc. (NASDAQ:RVBD) will face lower revenues. Risks for OPNET will be even higher. Revenue from the Federal government is around 30% of sales.

Competition

In the integrated router space, Cisco Systems, Inc. (NASDAQ:CSCO) is a Riverbed Technology, Inc. (NASDAQ:RVBD) competitor. Both companies face-off nearly 200 times each quarter, but Riverbed wins deals 90% of the time.



RVBD data by YCharts

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