Seeking Alpha
Long/short equity, growth at reasonable price, research analyst, deep value
Profile| Send Message|
( followers)  

The stock of Riverbed Technology (RVBD) had been absolutely decimated over the last six months as the company reported back on the Q411 report in January that it would be going through the growing pains of a massive new product cycle.

The stock dropped from $30 to $24 in January before rebounding back to $29 before falling off the cliff when Q112 results again disappointed. (See How Did A $5M Revenue Cut Turn Into A $1.35B Market Value Drop? article.) The company though remained resolute that the new product cycle and more importantly the important WAN Optimization market remained strong.

After the close on Tuesday, the company reported Q212 numbers that blew past analyst estimates, sending the stock up over 20% after hours back above $18.

Earnings Results

The company reported a large beat compared to analyst estimates. These numbers weren't significantly above where the company guided back in April, but the general analyst estimate was that the company was too bullish on the Q112 conference call. See recent article on the analyst debate here.

The quarterly report showed earnings of $0.23 versus estimates of $0.21 and revenue of $199M versus estimates of $194.5M. Revenue actually grew 17% over 2011 numbers.

More importantly the company guided to record numbers for Q312, especially gratifying for a stock left for dead. The guidance was for roughly $217M and $0.26, both numbers that will exceed the record totals achieved in the Q411 quarter.

Details

  • Non-GAAP revenue for Q2'12 was $199 million, an increase of 9% compared to $183 million in Q1'12 and an increase of 17% compared to $170 million in Q2'11.
  • Non-GAAP net income for Q2'12 was $37 million, or $0.23 per diluted share, compared to $33 million, or $0.20 per diluted share, in Q1'12 and $35 million, or $0.21 per diluted share in Q2'11.
  • Guided to Q3'12 revenue of $214M to $219M, an increase of 13% to 15% compared to $190M in Q2'11.
  • Guided to Q3'12 earnings of $0.25 to $0.26, an increase of 4% to 8% over $0.24 in Q2'11.

Juniper Networks Partnership

Riverbed also announced a deal with Juniper Networks (JNPR) that will contribute $75M in revenue over the next four years via a perpetual license. The deal will start adding $3M per quarter to revenue and gradually move up to $5M. More importantly the company already has the cash.

The deal involves the integration of Riverbed's Steelhead Mobile technology into the Juniper Networks Junos Pulse client to provide a mobile acceleration solution for mobile phones and tablets. The combined product allows for the two companies to deliver best-in-class WAN optimization solutions.

This partnership just might be the beginning of something bigger. The CEO was clear that the companies no longer compete and a partnership is probably a natural way to team up and compete with major rival Cisco Systems (CSCO).

Risk

Risks always exist especially in the networking equipment sector. On a relative basis, Riverbed appears to offer one of the lowest risks in the market as it rides the wave of a new product cycle over the next couple of years.

Valuation

Assuming analysts push 2013 earnings estimates back to the $1.25 range and above the current $1.11 average, the stock only trades at 14x forward earnings based on the $18 after hours price. In that scenario the stock will be cheap as it jumps into a cycle of 20%+ growth.

Conclusion

The moral of the story is that management is not always trying to mislead investors. Sometimes the story is exactly as presented by the executive team. Going on that theory, the WAN Optimization market is nowhere near saturation as presented in some analyst research notes.

Just as investors and analysts get too excited on the upside, they also do the same on the downside. Look to make this stock a core holding in any growth portfolio before the stock hits $20.

Tuesday July 24, 20122012-07-24T20:28:00Z

Source: Riverbed Technology: When A New Product Cycle Is Just A New Product Cycle

Additional disclosure: Please consult your financial advisor before making any investment decisions.