The steep drop of 14% in Riverbed Technology (RVBD) shares after earnings were reported contrasts to the 11% after-hours rise F5 Networks (FFIV). F5 beat consensus earnings and provided guidance that topped expectations. Juniper Networks (JNPR) rose after beating earnings expectations ($0.16 versus $0.13 per share estimates) and is holding its gains. Conversely, cloud partner Akamai Technologies (AKAM) dropped after posting disappointing outlook, and announcing its CEO would be departing.
With Riverbed appearing like it will re-test a weekly low, should investors buy into a transition story that will take a few quarters to play out?
Riverbed is a compelling long-play in comparison to Cisco Systems (CSCO). Patient Cisco shareholders will recall that Cisco cut management layers to be more responsive to the competitive market. Cisco shares responded appropriately, trading last at $20.16, up 53.18% from a 52-week low.
Riverbed still trades at a higher valuation than Cisco, but it is smaller by market capitalization ($3.13 billion versus $108.55 billion with Cisco). Riverbed has no debt, while Cisco has a debt/equity ratio of 0.34. Quite often, companies undergoing a transition and who are smaller than their companies are subject to speculation of being taken over. Any rumors the company will be taken over at current prices are an added bonus. For now, the focus at this time will be to evaluate the upside of buying Riverbed as the company works through its temporary challenges.
Taken from the conference call, Riverbed earnings are summarized below.
Results Summary:
- First quarter revenue was $183 million and was slightly below consensus
- Earnings of $0.20 per share
- Revenue: $183 million, up 12% year-over-year
- Product revenue was $117 million or 64% of total sales, up 4% year-over-year
- Service and support revenue was $66 million in the first quarter, representing 36% of total sales
- Service and support revenue grew 29% over the prior year
- Product gross margin was 79.5% in Q1, down 1%
- Service and support gross margin came in at 74.1%
- WAN optimization was 89% of revenue in the first quarter, NPM was 7% and ADC was 4%.
- Government, financial services, manufacturing and technology were the largest contributors in the quarter, contributing to above 10% of revenue
Forecast for Q2:
- Revenue between 193M and 197M
- Operating margin between 24 - 25%
- Q2 operating expenses to be between $103 million and $105 million
- 2Q EPS $0.21 - $0.22 on 169 million shares
- Full-year growth of 15%
Positives during the quarter:
- Some of the largest purchases are from cloud service providers or enterprise buyers deploying Stingray i.e. Amazon (AMZN) EC2
- Riverbed Stingray was a featured partner in IBM's (IBM) launch of its Cloud platform, PureFlex systems.
- Momentum from 'Granite' product
Negatives:
- New Challenges of being associated as multi-product company
- Recently hired Chief Marketing Officer has yet to prove to be effective
- Full-year growth cut to 15%
- Range of products is confusing customers
Here is a list of products to illustrate the need for extensive training and marketing:
- CX and the EX Steelhead appliance platforms (includes 40 new edge appliance configurations)
- Granite (edge VSI and VDI for server and desktop, respectively)
Note: Granite had strong momentum in Q1 reported quarter
- Steelhead Cloud Acceleration (a solution offered alongside Akamai )
Note: growth for this offering will take more than one quarter
- Cascade, with 15 configurations available
- Stingray
Note 1: Some of the largest purchases included Amazon EC2
Note 2: Riverbed Stingray was a featured partner in IBM's launch of its Cloud platform, PureFlex systems.
Competitive Analysis:
The main competition for Riverbed is Cisco Systems, Silver Peak Systems, and Blue Coat Systems (which was recently taken private). Riverbed has a 27% share of the WAN optimization market, more than twice Cisco's position. Silver Peak's "Magic Quadrant" product is the top competitor for Riverbed. During the last quarter, competition from Blue Coat softened slightly.
Company Strategy:
Now as a multi-product company, Riverbed needs to focus on Steelhead growth while selling to new market opportunities.
Analysis of Strategy:
Investors who do not believe Riverbed can turn around are also ignoring the fact that Riverbed chose to abandon the continued sale of old models to produce a bigger quarterly result. Riverbed chose instead to steer the company beyond two quarters.
Challenge:
Riverbed has two main challenges for the rest of the year:
- Riverbed needs to find a way to more effectively sell multiple products to different buyers. From there, the company would need to move to selling solutions. This is different from just selling point products.
- At the channel level, Riverbed needs to be better at educating, training, and being better at recruit partners.
Investors who are willing to buy shares at current prices must believe the company will be able to align its sales structure, processes and incentives effectively. Drilling down to the customer level, Riverbed needs to show its recently hired marketing officer will help the company deliver improved targeting and marketing to customers.
Final Analysis:
Riverbed is a company to buy. The 7 reasons to be positive that Riverbed will beat its lowered growth outlook are:
- Riverbed trained 300 channel partners in Asia in March
- Training for channel partners in Europe and U.S. are ongoing
- Gross margins continue to be in the high 70's
- New incremental distribution partnership announcements with large partners forthcoming
- 18-24 month turnaround story provides ample time for patient investors to accumulate shares on weakness
- WAN optimization remains a high priority for CIOs
- Companies adding staff are strong, not weak (Riverbed added 64 employees in March, and now has 1,674 employees)
