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Introduction

Riverbed Technology (RVBD) reported its earnings on Friday, 2/8/2013, and the subsequent drama wasn't pretty. The stock tumbled 18% to close at $16.56, down $3.54, and nearly 26,000,000 shares were traded which represents around 17% of the total issued and outstanding.

Earnings season announcements can create gyrations in a company's stock price tantamount to the effect that a merger or an acquisition can have. When an earnings "hit or miss" occurs, chart patterns and most everything else (including traditional metrics) are thrown out the window and the herd mentality takes over. Investors who are on the sidelines when this kind of headline appears may find significant opportunity. It's my view that this is the case with RVBD. It's act of diving off the cliff to the tune of 18% represents a buying opportunity where the risk/rewards make sense, especially when one digs into why the earnings miss occurred (or, if a "miss" occurred at all.)

And in terms of metrics, the sell-off resulted in some strikingly modest ones, especially for a company that boasts a 5 year growth rate of 35.83%. The most compelling "new" metrics are the following:

√ 11.66 forward P/E (12/31/2014)

√ .69 PEG Ratio (5 year)

√ 50.18 trailing P/E (TTM)

The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell". ~ Sir John Templeton

Overview

RVBD is a young Company, having been founded in 2002. Its tech niche is primarily in the sector of wide area networks (WANs) in the United States and internationally. WAN issues come into play when organizations consolidate IT and move to cloud environments; then, the distance created between users and their data often results in high-latency and reduced bandwidth. RVBD's products offer solutions to these challenges.

RVBD markets include customers in manufacturing, finance, technology, government, architecture, engineering and construction, professional services, utilities, healthcare and pharmaceuticals, media, and retail industries. The company sells its products directly through value-added resellers and distributors, service providers, and systems integrators, as well as through its own sales force.

According to the Company, "WAN optimization, network performance management, and cloud storage solutions enable enterprises to overcome these drawbacks. At Riverbed we make it easy to understand, optimize, and accelerate IT, so that organizations can build a fast, fluid, and dynamic IT architecture."

"Our award-winning line of WAN optimization solutions gives businesses an order-of-magnitude increase in the performance and value of their existing IT infrastructure and mission-critical applications. The applications we accelerate include file sharing, email, backup, document management systems, IT tools, and ERP and CRM solutions."

"The Riverbed Steelhead® product family - including physical appliances, Cloud Steelhead, Virtual Steelhead, Steelhead Mobile, and Steelhead Cloud Accelerator - boosts network throughput and application performance by up to 100 times."

Digging Into The Q4 Earnings Report

With its drop of $3.54 around $535 million in market cap vanished. It's my view that this enormous move down was a significant over reaction, especially considering what was actually reported:

√ Record revenue for its fourth quarter (Q4'12) and fiscal year ended December 31, 2012 (FY'12).

√ Annual revenue growth of 15%

√ Record revenue for its fourth quarter (Q4'12) and fiscal year ended 12/31/2012

√ Non-GAAP net income for Q4'12 was $46 million compared to $46 million, or $0.28 per diluted share in Q3'12.

√ Non-GAAP net income for 2012 was $0.99 per diluted share compare to $.90 for 2011

With respect to Q4'12, I believe that it's important to note that RVBD's Income Statement shows a $13,231,000 charge against income from "Acquisition-Related Costs." Adding this charge back puts the Company's performance in a more realistic and positive perspective.

Comments made by management during the earnings conference call were all positive, and guidance was not modified downward. Chairman and CEO Jerry Kennelly stated:

"Looking ahead, we will benefit from continued growth in our WAN optimization business and performance management product suite, I am very optimistic as we enter our first year as a billion-dollar-plus revenue company."

"Revenue dollars grew more than $111 million for the full year, with most of that growth from WAN optimization performance"

Forward Looking Events

√ It's projected that the global "Application Acceleration Market" will have a compound annual growth rate of 13.1%, with 2014 spending exceeding $4 billion.

√ Upbeat Analyst Projections

Over the next five years, the analysts that follow RVBD are expecting it to grow earnings at an average annual rate of 19.43%.

√ The RVBD / Juniper Partnership

Under the terms of the agreement, Juniper Networks (JNPR) licensed RVBD's application delivery controller ((ADC)) technology for approximately $75 million. RVBD and Juniper will begin a joint effort to integrate RVBD's Steelhead® Mobile technology as a WAN optimization solution for mobile phones and tablets.

√ The Acquisition of OPNET Technologies

The acquisition closed December 18, 2012 and contributed $6 million to GAAP revenue and $7 million to non-GAAP revenue in the fourth quarter.

Commenting on the acquisition Jerry M. Kennelly, Chairman and CEO stated: "Revenue dollars grew more than $111 million for the full year, with most of that growth from WAN optimization. Performance management was the fastest growing product line, underpinning our strategic decision to acquire OPNET. This acquisition also transforms Riverbed into a billion-dollar revenue company"

√ Globally, RVBD has captured more than 52% share of the WAN optimization market

Revenue Growth Rate

Quarter Ending% Growth
12/31/1217.03%
09/30/1215.18%
06/30/1216.54%
03/31/1211.52%%

Significant Metrics




MetricFactor/Number
Closing Price 2/8/2013$16.56
PE Ratio23.60
Annual Dividend Per ShareN/A
Next Ex-Dividend DateN/A
Effective YieldN/A
52 Week High$29.59
52 Week Low$13.30
Beta2.32
5 Year Growth Rate35.83%
Current Year Est. EPS$1.15
Next Year Est. EPS$1.42
Compiled by Craig Van Pelt
SOURCE: Scottrade

Conclusion

For all of the reasons stated above, RVBD should provide significant returns to shareholders in the near term by recovering from its recent sell-off. In the longer term, its continued growth and profitability is a good bet considering its best of breed status in the WAN Optimization sector, its recent acquisition of OPNET, and its strategic alliance with Juniper.

Given the stock's volatility, investors are advised not to panic if RVBD dips southward another point or so. Personally, I'm a buyer right now, and I'll buy more if it dips further because the real potential is several years from now.

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." Warren Buffett

Source: Riverbed Technology: Its 18% Dive Creates Opportunity