After Riverbed Technology, Inc. (NASDAQ:RVBD) reported quarterly earnings that included a less optimistic outlook than consensus, investors sold off shares in the company. The Wide Area Network (“WAN”) optimization solutions provider suffered a weak quarter for two reasons: (1) its expensive OPNET acquisition and (2) its reliance on government spending. With shareholders now holding losses, it is time to reset expectations and to consider accumulating Riverbed shares.
What happened
Riverbed Technology, Inc. (NASDAQ:RVBD) reported $255 million in revenue, a 28% increase (year-over-year) in the second quarter. Earnings were $0.22 per share. The recently acquired unit, OPNET, was a drag on results. Sales were $2 million below the guidance provided by the company.
Investors punished Riverbed Technology, Inc. (NASDAQ:RVBD) after results were reported. Prior to the results, Riverbed traded close to $18, because investors believed incorrectly that the integration of OPNET would be complete. Riverbed said there is at least another quarter before the integration of the sales team is complete. This implies that sales for OPNET will not yet operate at its optimum level until later this year. On its conference call, Riverbed said it will be between 6 and 9 months before the integration of the sales team is complete. OPNET has 700 employees, while Riverbed has 1800 staff.
Bright spots
Riverbed Technology, Inc. (NASDAQ:RVBD) reported a 44% increase in total sales for support and service. This was due largely to the OPNET acquisition. As the integration of the unit is completed by the end of the year or early next year, service revenue should be even higher too.
Geographically, sales grew in all locations. America is especially important, since 63% of sales come from this geography.
Product gross margin was healthy, at 80.5%.
Balance sheet analysis
Riverbed Technology, Inc. (NASDAQ:RVBD) has nearly $2 billion in assets, and $519 million cash. The $3.18 in cash per share is nearly equivalent to the remaining debt outstanding.
Outlook
Analysts believe that as much as 80% of end-user traffic will be WAN. Riverbed Technology, Inc. (NASDAQ:RVBD) has a suite of products to help customers manage their network infrastructure. The company wants its technology to be deployed in every data center. By selling performance management products to as many channels and partners as possible, Riverbed hopes to achieve this long term goal.
Riverbed Technology, Inc. (NASDAQ:RVBD) expects revenue will rise between 21% and 23% year-over-year.
Risks
18% of revenue comes from the government sector. The current quarter could have higher risks, since sequestration could limit funding related to WAN optimization. If this happens, then Riverbed Technology, Inc. (NASDAQ:RVBD) will face lower revenues. Risks for OPNET will be even higher. Revenue from the Federal government is around 30% of sales.
Competition
In the integrated router space, Cisco Systems, Inc. (NASDAQ:CSCO) is a Riverbed Technology, Inc. (NASDAQ:RVBD) competitor. Both companies face-off nearly 200 times each quarter, but Riverbed wins deals 90% of the time.
RVBD data by YCharts
One of the reasons Riverbed Technology, Inc. (NASDAQ:RVBD) is successful is that it is quick to react when responding to negative claims made by Cisco Systems, Inc. (NASDAQ:CSCO).
…and a related company
Riverbed Technology, Inc. (NASDAQ:RVBD) sells solutions that improve the network performance for application development software. For example, OPNET released AppInternals Xpert 8.5 that also targets Visual Studio users, which is made by Microsoft Corporation (NASDAQ:MSFT). This is positive, because demand for Microsoft development tools and related database software continue to grow. Last quarter, SQL Server sales grew 16%, while sales for Microsoft’s Server and Tools unit grew by 9%.
Conclusion
Riverbed Technology, Inc. (NASDAQ:RVBD) is not a stock for investors looking for a quick profit. The integration of OPNET will be completed by the end of the year, and acquisition costs and other unknowns could cloud its share price in the interim. Looking into 2014, Riverbed continues to promote a product that gives its customers a solid return on their investments. As the company wins more customers, revenue will grow, taking its share price higher.
Chris Lau owns shares in Riverbed Software. The Motley Fool recommends Cisco Systems and Riverbed Technology (NASDAQ:RVBD). The Motley Fool owns shares of Microsoft and Riverbed Technology.
The article This Network Company Is a Buy From Here originally appeared on Fool.com.
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