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

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!