Riverbed Technologies Pins Hopes On Growth In IT Spending

| About: Riverbed Technology, (RVBD)
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Riverbed Technologies (NASDAQ: RVBD) is struggling. The company, best known for its focus on wide area networks, performed dismally in the fourth quarter of 2012. Although its revenue was up 17 percent compared with figures relating to 2011's fourth quarter, earnings per share plunged 75 percent year-over-year. As expected, this lackluster performance affected investor sentiment. Since the announcement of the earnings in late February, Riverbed's stock has gone down more than 20 percent.

While this dip might translate into as a bonanza for short-disposed traders, the larger investment community is hurting. Amid the search for a solution, analysts have taken note of the IDC's projected 6 percent rise in 2013 in enterprise and IT spending. It's debatable if this spending increase will pull Riverbed Technologies out of its doldrums.

Stabilization of Economy in Second Half of the Year

According to the IDC, the 6 percent step-up in IT and enterprise spending will ride on the tailwinds of economic growth. IDC notes that spending toward the fall of 2012 and at the onset of 2013 was affected by concerns over the fiscal cliff. The political standoff brought about by the fiscal cliff, coupled with the economic meltdown in Europe, greatly affected IT spending.

The effects of the hostile spending environment cut across the entire industry. In fact, Riverbed's 17 percent year-over-year gain in revenue outpaced the industry average of 14.1 percent. IDC however notes that the economy will stabilize in the second half of the year, arguing that this will lead to passably strong IT spending growth. Going by these expectations, Riverbed Technologies may be able to reverse its fortunes somewhat in the next three quarters. Wide area networks, which are its main area of focus, continue to remain exposed to the trending technologies in the industry.

One particular trend that will brighten Riverbed's prospects in wide area networks is the increased use of smartphones and other mobile devices for data. This trend has greatly accelerated the growth of Application Delivery Controllers, which help ensure that applications swiftly move through networks without denudation. Because of the need for bandwidth rich applications, Riverbed's ADC is likely to generate good business.

As it is, Riverbed controls 51 percent of WAN optimization. If it can sustain, or even grow this market share over the next two quarters, it will be able to regain its footing in the market moving forward. Nonetheless, this will greatly depend on its ability to fend off competition from bigger players like Cisco (NASDAQ: CSCO). Cisco has been spending aggressively in WAN. Late last year, it paid $141 million for Cariden, a privately held software company in the networking sector. Soon after, Cisco signed off to a $1.2 billion deal for cloud infrastructure startup Meraki. These acquisitions signal Cisco's intention to gnaw into Riverbed's market in the WAN sector.

In the end, the expected improved IT spending in 2013 will create a favorable environment for Riverbed moving forward. Riverbed's long-term success will, however, depend on its ability to ward off competition and more importantly, its responsiveness to trending technologies in the market.

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.