Riverbed Impacted By Government Shutdown

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Typical of the quarterly reports over the last couple of years, Riverbed Technology  easily surpassed earnings estimates. The concerning part for investors are that the WAN optimization specialists failed to meet revenue numbers. On top of that, the primary Steelhead product had virtually flat growth from the prior year.

The application performance company is still busy wrapping up the integration of the OPNET acquisition from the end of last year. So far the deal isn't generating the revenue synergies expected, but that could be due to a staggering slowdown in government spending. The company obtains a large portion of revenue especially during the third quarter of the year so a rebound in government spending could benefit Riverbed more than most.

Whether the government shutdown or the transition to cloud software, the network infrastructure group that includes Riverbed and the likes of F5 Networks  and Juniper Networks  have been struggling with headwinds.

Government impact
For the third quarter, Riverbed posted revenue of $265 million compared to $267 million analyst estimates. A slight miss on revenue isn't too surprising in the technology sector these days due to the government slowdown. The shocking part though was the level of impact. In previous years, Riverbed generated Q3 revenue from government accounts of around 25% of revenue. The company wisely guided down toward only 20% for this year, but unfortunately that amount wasn't even hit. In reality, government spending fell further than expected to only 18%. On a normalized basis, the revenue total could've been $20 million higher providing a massive shot to earnings.

The revenue guidance for Q4 came in a disappointing $273 million on average compared to an estimate of around $284 million. Management expects government spending to be affected over the next couple of quarters so all of the disappointment could be due to that segment alone.

Buyback plan
During the quarter, Riverbed bought 3.1 million shares for approximately $50 million at an average price of $16.05. Considering the stock has spent most of Oct. trading in the $14 range, the company didn't do a very good job repurchasing shares. If the company knew it was going to reduce revenue guidance for Q4, it doesn't add up why it was aggressively buying shares.

Riverbed generated $42 million in free cash flow so it has plenty of cash coming into the coffers each quarter. It does have net debt of $1 million (total debt of $522 million) due to the money powered to purchase OPNET. Though interest rates are low, it now spends nearly $6 million quarterly on interest expenses. With adjusted income of $43 million for the quarter, the interest expense isn't huge but a reduction would add to income levels.

With only $213 million remaining from the original stock buyback authorization of $500 million, investors might have expected a reduction in the share count. Unfortunately, the buyback doesn't appear to be keeping up with stock option issuance. The outstanding shares jumped over 6 million shares from the 162 million outstanding at the end of Sept. 2012.

Cloud impact
A major concern for all networking equipment stocks is that the utilization of cloud software products will reduce the need for special equipment to optimize the network and speed up Internet usage. Riverbed claims the opposite as important data is increasingly housed at data centers further away from employees. The greater distance should increase the need for performance network gear. The results of F5 Networks and Juniper Networks along with Riverbed aren't suggestive of this theory.

In the last quarter, F5 Networks generated 14% of sales from the government vertical and 7% of that from the Federal level. The company generated 15% growth in the Americas over the same quarter last year. The real issue appears to be in the Asia region that accounted for 18% of revenue, yet the numbers were down from the previous year. To back up the claims of Riverbed, F5 Networks management did point out the expectations of a more significant pullback in sales from the US Federal government portion.

For its part, Juniper Networks only mentioned some softness in the US Federal government sector while showcasing an 18% increase in Americas revenue. The biggest weakness in the Juniper report came from a 5% year-over-year decline in EMEA revenue. Juniper forecast healthy demand in Q4 with only minor softness from the Federal government shutdown.

Bottom line
While network infrastructure spending in the cloud software world remains a big concern, the details continue to suggest that the biggest issue is soft global demand and minor impacts from US Federal spending. Unfortunately, Riverbed Technology is seeing a larger impact after the OPNET purchase. Going forward, Riverbed could well benefit from tailwinds as the government plays catch up on technology spending.

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The article Riverbed Impacted By Government Shutdown originally appeared on Fool.com.

Mark Holder and Stone Fox Capital Advsiors clients own shares of Riverbed Technology. The Motley Fool owns shares of F5 Networks and Riverbed Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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