Riverbed: Stretching For Growth Usually Does Not Pay

| About: Riverbed Technology, (RVBD)

After reporting earnings this week, Riverbed (NASDAQ:RVBD) has now missed Wall Street expectations in two consecutive quarters since the company completed the acquisition of OPNET. The stock is down approximately 38% since the company announced the acquisition on October 29th, 2012. Unfortunately, for Riverbed and its shareholders, it is usually difficult for entrepreneurial, "category killer," primarily single product line company management teams to adjust to slowing growth and the maturity of their once high-flying core business. Riverbed, like most companies facing this dilemma, tried to acquire their way back to growth.

The initial acquisition attempts were small, privately held companies that were acquired when the company was still experiencing strong growth (e.g. Mazu, CACE, Zeus and Aptimize) and did not require significant capital. Specifically, Mazu and CACE, which formed the basis of the company's Cascade product offering, were acquired for approximately $25 million in 2009 and <$20 million in 2010 respectively. These two acquisitions have done relatively well as Cascade business has consistently grown for Riverbed and is now generating revenues of about $20 million a quarter or about 8% of sales. The Zeus/Aptimize acquisitions in 2011 were larger on the order of ~$140 million. Riverbed has seen some payback on these acquisitions as it received a $75 million licensing agreement from Juniper Networks (NYSE:JNPR) for the Zeus technology in 2012 and Zeus/Aptimize products are now generating about 5% of sales or about $12 million a quarter.

The acquisition of OPNET in 4Q12, however, was a large acquisition on the order of $921 million in enterprise value that was acquired when the company's core business was maturing and slowing. Not only was this acquisition significant in size, but it, also required the company to issue debt on the order of $560 million, more than the company's cash/investment balance at the time of the acquisition. Through the acquisition of OPNET, Riverbed was seeking to leverage its initial success in its Cascade business through a large acquisition that expanded the company more broadly into the Performance Management business. The prior, generally successful acquisition methodology of acquiring small, privately held, single product companies that were beginning to ramp sales was abandoned for an acquisition methodology of achieving scale in a business segment that was generating less than 10% of total company revenues. Thus, the company made a big bet in a business that was a small part of revenues, in hope it could be the next growth driver for the company. While longer term this strategy may work, the first couple of quarters suggest the company has work to do to make this acquisition and new growth strategy successful.

Riverbed is now facing the difficult challenges of its core business of WAN Optimization growing in the mid to upper single digit range, while OPNET is not hitting revenue expectations. The company has also seen its CTO and CFO resign earlier in 2013 (both positions have been filled since the initial departures). The good news for the stock is that the company has added new board members from larger technology companies Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) that may help the company in its scaling and acquisition integration efforts. The company also continues to earn in the $0.20-$0.25 a quarter even during these difficult quarters, which may limit significant downside from current levels. If earnings growth does not resume, however, the stock could still fall below the $14 level if quarterly earnings stay in this range given the company does not have a large net cash position to cushion further declines. I would avoid buying the shares at this time and wait to see better execution on the OPNET acquisition.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: NT Advisors LLC is a consulting firm serving the technology, private equity and venture capital industries.