Riverbed: Back on Track, but Future Derailments Possible

Riverbed bounced back from a disappointing set of results in two prior quarters by producing relatively strong numbers in its fiscal third quarter.

As reported by the Associated Press (AP), net profit in the three months to Sept. 30 hit $5.5 million, or 8 cents per share, compared to a net loss of $12.4 million, or 17 cents per share a year ago. Adjusted for one-time items such as stock-based compensation, the company said it earned 19 cents per share.

Revenue grew 18 percent to a record $102 million. Analysts surveyed by Thomson Reuters expected earnings of 15 cents per share on revenue of $97 million.

Nonetheless, looking ahead, market analysts are concerned about operating margins and about the lack of major new products at the company.

A market leader in WAN optimization — where it competes primarily against Cisco, Blue Coat, and Juniper — Riverbed had been expected to expand its product portfolio with Atlas, a storage-optimization appliance that it preannounced with considerable fanfare in the fall of 2008. That plan has been scrapped.

With Atlas having been shrugged off, Riverbed is planning to announce a new product that will enable public and private cloud computing for its enterprise and government customers. More details on that offering will be available next month at Interop in New York.

According to a transcript of Riverbed’s analyst conference call available at Seeking Alpha, Eric Wolford, the company’s senior vice president of marketing and business development, had the following to say regarding the company’s reversal on Atlas:

“First, we made the business decision that Atlas is a standalone product, which is not a good fit for Riverbed; and then second, as I said earlier, we saw and I’m sure you all see it, too, that there is a very attractive market opportunity where we’re very strong and we can innovate and we can come up with some very exciting new products to enable clouds for enterprises and government.

So it’s a big shift going on inside of IT. There’s a long run shift and there’s problems that are identified by various smart organizations and we can solve those problems. So we’re going to disclose more about what we’re doing with regard to cloud at Interop. But, basically, it was those two things: business decision on Atlas and attractive alternative market opportunities to go after.”

Still, Riverbed was exceptionally enthusiastic about Atlas. It made bold claims regarding the product’s commercial prospects and its value proposition for customers. Market analysts and customers can be easily forgiven for wondering what happened between then and now. They also can be excused for applying greater skepticism to subsequent grand product strategies Riverbed might wish to preview.

Some analysts also are concerned about renewed competitive vigor from Cisco, courtesy of new WAN capabilities in its ISR G2 router. Riverbed says it isn’t unduly worried about Cisco, having held its own against the networking giant previously.

Another concern for Riverbed is that it is deriving an inordinately high percentage of its business from government accounts (about 29 percent of revenue in the just-finished quarter). By its nature, that business will be lumpy from quarter to quarter, so Riverbed must look to grow elsewhere to compensate for potential irregularity in revenue flow from government customers.

To summarize, Riverbed got back on track in the third quarter, but that doesn’t mean it won’t experience future derailments.

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