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From the Small- and Mid-Cap Survey: Riverbed Technology, Inc.
Riverbed Technology, Inc. (RVBD) was founded in 2002 to improve the performance of wide-area distributed computing and shipped its first products in May 2004. To date, the vast majority of the company’s revenues have derived from products and services that improve the performance of wide area networks (WAN) – telecommunications networks that link geographically dispersed worksites, branches, employees, etc. Riverbed has sold its offerings to over 18,000 customers worldwide in a great variety of industries, including manufacturing, finance, technology, and government, among many others.
Riverbed’s main product line is the Steelhead family of software offerings, which it sells in both appliance and software form for public and private cloud uses. U.S. list prices for Steelhead products range from around $3,500 to $235,000. Steelhead products help customers optimize the performance of their WANs by increasing data transmission speed by up to 50 times, and in a few cases, up to 100 times. Other benefits include branch office information technology (IT) consolidation, speeding up cloud-based applications, reducing redundant WAN traffic, which lowers the need for additional bandwidth, and improving productivity and easing frustration for IT managers. Partnering with Akamai (AKAM), Riverbed recently introduced Steelhead Cloud Accelerator, combining Akamai’s Internet optimization technology with Riverbed’s WAN product to improve the performance of software-as-a-service (SAAS) in the cloud.
As business needs have become more complex, Riverbed has added products and services beyond pure WAN optimization. The Cascade line works closely with Steelhead products but also offers network performance management (NPM), permitting clients to troubleshoot critical services and lower IT management costs. The Whitewater gateway extends Riverbed’s de-duplication service to cloud-based storage, significantly cutting the amount of data traversing networks and the cost of data backup. The Stingray line of application delivery controllers provides data-center based performance optimization, application reliability, and application firewall capabilities.
Riverbed says that it has no direct competitor with a comprehensive WAN optimization offering. Competitors in other lines include Cisco Systems (CSCO – Free Cisco Stock Report), Juniper (JNPR), Citrix Systems (CTXS), and the privately held Silver Peak Systems and Blue Coat Systems.
In 2011, about 90% of Riverbed’s revenues were derived from WAN products and services, though recent acquisitions had begun to diversify the income stream, which led to criticism of the company as a "one-trick pony". Beginning early in 2012, the company began to introduce a broader product line, including new, higher capacity Steelhead models and offerings in the other lines. The extra marketing efforts reduced sales force concentration on existing products, which, in turn contributed to a mere 4% increase in product sales in the March 2012 quarter. Too, Riverbed believes some customers delayed purchases while waiting to review the new offerings. The result was a 50% plunge in first-quarter GAAP earnings, to $0.04 a share. On a non-GAAP basis, excluding stock-based compensation, amortization of intangibles, and some minor items, results were $0.20; that equaled results in the prior-year period. Non-GAAP earnings per share were $0.90 in 2011, up 53% from 2010. The stock dropped around 30% at the news. Still, we look for non-GAAP share net to advance moderately to around $1.00 in 2012.
Riverbed makes a compelling case that it has just skimmed the large market for WAN optimization, despite the first-quarter results. The company is just beginning to break into retail, where big customers could buy Riverbed products for thousands of locations. The federal government is currently a large customer and will likely lift its purchases. Beyond the pure WAN market, there are growing needs to streamline performance in areas such as virtual data infrastructure, data center consolidation, and cloud computing, and, for the first time, Riverbed has products that address all these needs.
With its shares down by well over half from their high, we think that both growth and growth at a reasonable price (GARP) accounts could profit from a position in Riverbed.
For a look at the cloud and some companies operating in it, see “Having Your Head in the Cloud”, by Randy Shrikishun, February 5, 2010.
At the time of this article’s writing, the author had no positions in any of the stocks mentioned.