Shares of Riverbed Technology (Nasdaq: RVBD), a provider of WAN optimization solutions, have rebounded 49% from a July low of $13.30. But at a recent price of $19.86, the stock still has plenty of ground to make up. It's down 15% for the year and remains well below the March 2011 high of $44.70.
Riverbed, a former high flyer, had recovered sharply off a November 2008 low of $7.10. At the July low, it was transformed into more of a tech value stock, with a market cap of just over $2 billion (2.4 times the 2012 consensus revenue estimate), no debt, and $550 million in cash and investments on the balance sheet.
A messy product transition this year caused the shares to tumble. It was the first significant refresh in four years for Riverbed's core Steelhead appliances, which are used to speed up data connections between corporate headquarters and branch offices. From an execution standpoint, the transition didn't go so smoothly.
One big problem was confusion within the customer base. In fact, even the sales force was a little confused. Riverbed had been known only for selling point products in WAN optimization; this core business still generates 90% of its total revenue. But the company has been working to make itself more of a multi-product company, selling everything from network performance management solutions to virtual application delivery controllers and edge virtual server infrastructure solutions.
It would be surprising if any company could execute such a broad transformation while refreshing its core product line without some setbacks.
Riverbed's new Granite edge VSI solution, which allows IT departments to consolidate and manage all edge servers from the datacenter, is most misunderstood. It promises to do for edge servers what virtual desktop infrastructure did for desktops. With Granite, enterprises can consolidate edge applications, servers, and storage to the datacenter while delivering services to the edge as if they were local. The resulting cost savings can be as high as 50%.
Customers are learning that edge VSI is a complementary technology to WAN optimization; it accelerates the performance of applications not addressed by Riverbed's core products. However, enterprises must be fully educated about Granite before they'll decide to buy. And this confusion caused extended sales cycles for Riverbed's Steelhead appliances, because customers were taking their time to assess how all the offerings could work together.
Product revenue in the first quarter rose just 4% from a year earlier, and Riverbed managers sounded flustered on the first-quarter earnings conference call. They struggled to handle a barrage of questions from Wall Street analysts about the company's growth trajectory.
The second-quarter results came in better than expected. Revenue rose 16.5% to $198.5 million, above the consensus estimate of $194.4 million, and product revenue advanced nearly 11%. That earnings call had a more positive tone. Managers said that the sales execution issues were resolved in May, and that growth accelerated in June. Riverbed's sales force is back to focusing on the Steelhead product line and the Cascade NPM offering. The adjacent product lines now have their own dedicated sales teams.
For the third quarter, the company expects earnings of 25 to 26 cents per share (versus the consensus estimate of 24 cents) on revenue of $214 million to $219 million (versus the consensus estimate of $210.4 million).
Riverbed shares trade at 20 times the 2012 consensus earnings estimate of 96 cents and 17 times the 2013 consensus of $1.15. The consensus revenue estimate for next year of $955 million indicates growth of 15%.
The pullback in Riverbed shares attracted some value-focused investors, including Parnassus Investments, which opened a position of 2.64 million shares in the second quarter. Manning & Napier Advisors, which often picks up beaten-down tech names on the cheap, opened a position of 5.16 million shares in the first quarter and added 4.9 million shares in the second quarter to bring its total holdings to 10.08 million shares, making it the second-largest Riverbed investor behind Fidelity, which owns 25.2 million shares. Riverbed put its own money to work by spending $100 million in the second quarter to repurchase shares.