Riverbed Technology, Inc. (RVBD)’s Punishment Seems Overdone

Page 1 of 2

It would seem that this earnings season hasn’t exactly been kind to tech investors, especially those that have placed huge bets on cloud companies. After subpar results from F5 Networks, Inc. (NASDAQ:FFIV), the Street showed no mercy to VMware, Inc. (NYSE:VMW), sending the stock down 20% after what was really a decent report. But when the company issued its outlook for Q1, investors absolutely despised what VMware implied about the prospects for the virtualization industry.

Essentially, the market had little patience for poor performance and was poised to punish anything with a hint of caution. Unfortunately, Riverbed Technology, Inc. (NASDAQ:RVBD) met this criteria. While this company has been doing well by making the best of a bad situation, concerns about management’s ability to pilot Riverbed out of a weak wide area network — or WAN — optimization business have heightened. But amid the slowdown, the company was still able to secure 52% market share, surpassing rivals like Cisco Systems, Inc. (NASDAQ:CSCO).

Riverbed Technology, Inc. (NASDAQ:RVBD)Nonetheless, the stock dropped as much as 22% following Riverbed’s fourth-quarter earnings results. The company has been going through periods of transition, including the acquisition of OPNET for roughly $1 billion. For several reasons, this was a move that I was not in favor of. But I’ll get to that in a moment. Plus, it was clear in the earnings report that there were some disruptions in Riverbed’s core business. How much of that can be attributed to OPNET can only be speculated upon. But suffice it to say, the Street was not pleased. But was the punishment deserved?

Guidance was soft, but let’s not get carried away.
Despite the stock’s beat down, fourth-quarter earnings weren’t that bad, relative to expectations. Revenue climbed 17% year over year and 9% sequentially. Likewise, product revenue was solid, up 12% year over year and advancing 9% from Q3. However, profitability was another issue, as profits tumbled close to 80%. But this was not a surprise. I think some investors are dismissing the costs related to the OPNET deal. But a few other metrics raised eyebrows.

Operating margin arrived at 27%, down 2% year over year and 2% sequentially and missing Street estimates by 150 basis points. But minus the deal for OPNET, which has averaged operating margins in the mid to high teens, Riverbed would have fared 1% better. But 8% growth in operating income was a bit weak. This is even though the company advanced gross margin by almost 1% year over year. But it was down close to 2% sequentially. So, overall this report was far from a disaster.

However, as with VMware, it wasn’t so much was Riverbed did, it was it said. Analysts absolutely hated the company’s tepid guidance, which presumes very little synergistic OPNET benefits for the entire fiscal 2013. For that matter, the deal doesn’t present any sort of cost advantage, at least not until 2014. For the first quarter, Riverbed expects to earn $0.23-$0.24 per share on revenue $257 million. Even if revenue arrived at $266 million — the high end of its range — it will (at best) top estimates by less than half of a percent. And EPS would be $0.02 shy of the consensus of $0.26 per share.

A lucrative deal requiring more patience than investors have
It is clear that Riverbed is treading cautiously knowing that OPNET is not yet fully integrated. As a result, the company wants to leave as much margin for error as it can, even it if means near-term discomfort to investors. I can’t fault Riverbed there. However, and as I said above, I had my doubts about the OPNET acquisition when it was first announced. The timing seemed off, especially since enterprises were showing little interest in spending.

The direction of the WAN optimization business was (at the time) unclear. Making matters worse, paying $1 billion in cash and stock was a hefty 34% premium to pay over OPNET’s prior closing price of $32. What’s more, based on OPNET’s projected 2013 revenue, there wasn’t much the company was expected to immediately bring to Riverbed’s table, which in this recent quarter netted out to revenue of $6 million.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!