After the close Tuesday night, Riverbed Tech (NASDAQ:RVBD) reported inline earnings and revenues that were slightly lower than estimates. The stock was crushed in after hours as traders overreacted to the revenue disappointment and ignored the record margins.
The encouraging news was RVBD reporting record gross and operating margins. This means that RVBD wasn't cutting prices to just make the estimates. If anything, it backs up the claim that weakness in EMEA was as much about closing deals as competition.
Other good news was that it used a part of its $611M cash hoard to invest in two new companies, Aptimize and Zeus Tech, that will be accretive in 2012. Also, US product sales grew by 50% and sales would've met the midpoint of analysts estimates if it had been able to ship the surge of orders in the last few days.
On the downside was the weakness in EMEA and, surprisingly, Germany. It's difficult to argue that the weakness was just related to debt woes, considering Germany has a very strong market. In reaction to the weakness in that area, RVBD has hired a new senior VP of sales for EMEA who was previously an executive vice president of global accounts at EMC.
Guidance for Q3 was basically inline at $0.22-0.23 (excluding $0.01 for the mergers) and $184-189 in revenue with a few million from the two mergers.
Speaking of the deals, Aptimize provides web content optimization, an innovative new technology area that allows customers to deliver both internal web applications, like SharePoint, and external web applications, like e-commerce websites, much faster. Organizations that deploy the Aptimize solution have accelerated performance up to 400%. The Aptimize solution is often deployed in tandem with wide area network optimization controllers and application delivery controllers (ADCs) to enhance performance. The company is expected to only provide low single digit revenue in the first year so it won't have a huge impact.
The Zeus Tech deal on the other hand is expected to provide over $20M of revenue in the first year. Zeus pioneered the development of software-based highly scalable ADCs. The Zeus virtual ADC (vADC) delivers the highest performance, and supports the broadest range of hypervisors, including VMware, Xen, HyperV and KVM. Zeus vADC solutions are used by over 1,500 customers worldwide, including seven of the top 10 telcos, a majority of the leading cloud service providers, major broadcasters, and top media and e-commerce companies.
Both companies along with existing RVBD products allow it to have the broadest and best portfolio of performance optimization products to solve customer performance problems. RVBD should be set for continued strong growth and investors should not lose sight that revenue growth was still at 35% even with European problems.
It should also be noted that leading network security provider Fortinet (NASDAQ:FTNT) is also down 20%+ following a generally good earnings report, but one that also saw near term issues in Europe. Wedbush lowered its target from $29 to $27 due to that reason. If anything, this suggests that European weakness at either company is more a short term industry issue than a company-specific product problem or competition. FTNT is worth a look after the drop, but for now we're sticking with RVBD after it reported record margins.
- Total revenue increased 35% year-over-year to $170.3 million.
- Product revenue increased 38% year-over-year to $116.9 million.
- Service revenue increased 28% year-over-year to $53.4 million.
- Record non-GAAP gross margin of 78.7%, compared to 77.3% in Q2’10.
- Record non-GAAP operating profit of $50.3 million, increased 65% year-over-year.
- Record non-GAAP operating margin of 29.6%, compared to 24.2% in Q2’10.
- Record non-GAAP net income of $34.9 million, increased 81% year-over-year.
- Cash and investments increased 45% year-over-year to $611.1 million.
Disclosure: I am long RVBD.