Monday, September 3, 2012

What Happened With Riverbed Technology?

I suspect a few plastic surgeons will be getting some odd calls in the next few days thanks to Riverbed Technology $RVBD After the shorters have had their faces stitched back on, it might be the right moment for a bit of consideration over what actually happened and what we can expect in future from Riverbed.  I’ve rarely seen a stock so beaten up by the media and the analyst community. It’s time to listen to what the company is saying and reporting.

Previous Results Were a Leaping Salmon to a Bear

Riverbed disappointed at the last set of results but it guided toward a 15% revenue increase ... a number that many didn’t believe. In fact, Riverbed’s insistence that the weakness was due to a new product cycle caused analysts no end of skepticism and they were quick to start downgrading. Ever since then, investors have heard one argument after another whose main purpose seemed to be to justify the falling stock price.

The PE ratio was seen as too high, even though the company remained cheap on the cash flow evaluation that really matters. The WAN optimization market was seen as saturated, even though Riverbed always explained that a large part of their sales are to green field accounts. Cisco $CSCO and Juniper Networks $JNPR (who are now partnering with Riverbed) were supposed to be grabbing market share, even though Riverbed said they didn’t see any step up in competition.  In short, the company was toast.

It didn’t quite work out that way.

Is this a Sales Call?

Going into these results the key moot point was whether the weakness in the previous two quarters was a consequence of a slowing marketplace or hiccups with execution over a new product cycle. Optically they are the same, but for a deeper understanding I think investors need to consider some of the dynamics of how sales guys think.

In my experience, a good sales guy will always try and close the immediate deal in front of him. Continuity and sales discussions are fine but it is only a means to an end. ABC does not stand for Always be in Continuity and coffee really is only for closers.

So consider what happens when an upgrade occurs in a product range that already requires educating the buyer as to the potential return on investment generated by buying it. In addition, the sales force are asked to start selling (in some cases) to slightly different key decision makers because of the change in product.

In my experience this is likely to create some disruption. I doubt many sales guys would be particularly enamored with trying to generate new business by starting from scratch with a new collection of decision makers and explaining the difference in the product upgrade to them. In my humble opinion, they are more likely to chase the "easy" deals. In other words, they would run after existing customers and try and sell the new upgraded products to them or at least focus efforts on converting the "hottest leads" from their lead book.

This is not necessarily the best approach in IT whereby customers prefer to run existing technology until they can receive anecdotal or professional information on how the new offerings are working. Similarly, resistance to undergoing the expense of an upgrade cycle is natural among customers who are happy with the existing technology. These things take time and from an operational perspective, it will require a realignment of the sales force’s priorities. It is no wonder that Riverbed had execution issues.

Execution Issues Fixed?

Riverbed appears to have fixed its previous sales execution issues. Management stated that it took until the end of May in order to get its sales compensation plan realigned in order to realign the sales force to the new product cycle. Riverbed beat on both revenues and earnings and guided above consensus for the next quarter where a "normal run rate" for Q3 is expected. The pipeline of orders is encouraging confidence, even though Riverbed stopped short of confirming the 15% revenue guidance increase.

Juniper Deal Makes Sense

There seems to be a certain amount of cross completion in technology these days. For example F5 Networks $FFIV is developing data center security solutions and competing with Check Point and Juniper. In this case, Riverbed and Juniper are teaming up to challenge F5. Juniper will pay $75 million for Riverbed’s application delivery controller (ADC) technology, while the two companies will collaborate on WAN Optimization controllers. The deal makes sense because Juniper is an also-ran in the WAN Optimization market and the ADC product line only makes up 3% of Riverbed’s revenues.

Where Next for Riverbed?

I think the key take away from these results is that things aren’t as bad as many thought they were. The fact that Riverbed didn’t strongly affirm the previously given 15% revenue increase guidance is probably a sign that the market is weaker than it had thought it would be early in the year. No matter, it is not the kind of Armageddon that so many analysts and commentators were thinking it would be. The WAN Optimization market isn’t saturated and investors can get back to analyzing the company based on the underlying fundamentals rather than paranoia and noise.

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