Riverbed Plays the Guidance Game -- and Loses

Expensive stocks have expensive swings. That's the takeaway for Riverbed Technology (NAS: RVBD) shareholders, myself included, after the company reported fourth-quarter earnings last night.

The WAN optimizer's shares are lighter by as much as 23% as of this writing. What was Riverbed's egregious offense? Were its fourth-quarter and full-year results bad enough to warrant it losing over a fifth of its value?

Sales rose 23% to $203 million, while non-GAAP net income added up to $41 million, or $0.25 per share. That's a jump of 32% over last year's $0.19-per-share profit. For the full year 2011, revenue finished at $726 million, a 32% gain, with earnings of $0.90 per share, a 53% jump. The quarter's results topped what the Street was looking for, which was $200.8 million in sales and a $0.24-per-share profit.

Those figures all sound fine and dandy to me. CEO Jerry Kennelly added, "We believe we are in the strongest strategic and competitive position in our history. Adding to that, early in 2012 we will be entering what we believe will be Riverbed's most exciting and important product cycle yet."

So where's all this pessimism coming from? Guidance.

First-quarter revenue is expected to be in the range of $183 million to $187 million, yielding earnings per share of between $0.19 and $0.21. Those digits are shy of the consensus estimates of $197.1 million and $0.25 per share, respectively. Expectations aside, the guidance midpoints are $185 million and $0.20 per share, which would represent year-over-year growth of 13% and 0% over 2011's first quarter.

The prospect of slowing growth is what's spooking investors, since shares were trading near 88 times earnings. That's an expensive stock that needs to keep growth up to keep shareholders happy.

The Europe, Middle East, and Africa geography jumped 36%, a healthy sign considering that region weighed on results a couple of quarters ago. After going away last quarter, the bears are seeing an invite back into town.

Contrast the numbers to rival F5 Networks (NAS: FFIV) , which recently soared after its results, although it specializes more in application delivery than WAN optimization. Smaller rival Blue Coat Systems (NAS: BCSI) hasn't been doing well, but its public life is coming to an end. Cisco Systems (NAS: CSCO) continues to be the Goliath in the room, but Riverbed is still a better niche play for its growth prospects.

Slowing growth is never encouraging, but Riverbed was recently named a leader in WAN optimization by Gartner, a title it also earned last year. WAN optimization continues to gain momentum as businesses realize the IT savings it can provide, and despite today's drop, I'm still looking forward to the long haul.

WAN optimization is one aspect of the mobile revolution, which is set to become "The Next Trillion-Dollar Revolution." There are lots of companies that are set to cash in on it, but one in particular has excellent prospects. The company is one of a few players that will help power the mobile devices of the future, and it also has exposure to the explosive growth in China. I've given it an outperform CAPScall. Get access to this 100% free report to find out what company I'm talking about.

At the time this article was published Fool contributor Evan Niu owns shares of Riverbed Technology, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Cisco Systems. Motley Fool newsletter services have recommended buying shares of Riverbed Technology and Cisco Systems. Motley Fool newsletter services have recommended writing covered calls in 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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