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Coverage Initiation: Riverbed Technology (RVBD)
Value Line recently initiated coverage of Riverbed Technology (RVBD) in its flagship product, The Value Line Investment Survey. The company primarily sells what it calls “appliances” that help speed up networks and also support services to its customers. Although the technology behind the company’s offerings is complex, it is serving a growing demand. Its product suite includes the Steelhead, Cascade, Stingray, and Whitewater product families.
Although Riverbed sells some of its products as software, the vast majority of its revenue comes from the sale of hardware, which it calls “appliances”, on which its proprietary software is installed. These appliances help speed up networks by simultaneously addressing application protocol inefficiencies, network protocol inefficiencies, and bandwidth limitations. If that sounds like a foreign language to you, you wouldn’t be alone—suffice it to say the company sells boxes that make networks more efficient. Appliance sales accounted for about 70% of 2011 revenues.
The company outsources the manufacturing of its products, exposing it to the inherent risks of quality control, manufacturing disruptions beyond its control, and relationship management. An issue arising in any of these areas could cause material problems for Riverbed and lead to a loss of sales. That said, this structure allows the company to focus on the development of products instead of the manufacture of them. Research and development is vital in the fast changing technology industry, particularly in the network space as more and more companies look to shift to public and private “cloud” based solutions.
Riverbed also makes extensive use of resellers in its sales efforts. The company has its own sales force, but over 95% of revenues were derived from the more than 1,800 partners it has selling on its behalf. Arrow Enterprise Computing Solutions accounted for 14% of the company’s sales in 2011, making it an extremely important partner relationship; no other company accounted for more than 10% of sales. As with the outsourcing of manufacturing, using third party sellers has allowed the company to focus on its technology. Note that sales can be impacted by demand for technology and tend to be lumpy in nature, making quarter to quarter comparisons difficult at times.
In addition to its appliances, the company offers support services to customers. This revenue is largely derived from subscription agreements and accounted for about 30% of the top line in 2011. Product support involves internet access to technical content, and telephone, internet, and email access to technical support personnel. The company’s support contracts typically have a one-year term.
The industry in which the company operates is highly competitive and still evolving. As such, maintaining a strong industry position is vital. This requires a mixture of cutting-edge products, high-quality products, and customer centered support services. Interestingly, however, one of the biggest threats to Riverbed would come from technology similar to its own being imbedded into networking gear, since its products are standalone entities. Should such a technology shift take place, the company’s products could quickly become irrelevant.
Mergers and acquisitions are an integral part of the company’s business model. It acquired one company in 2009, and two each in 2010 and 2011. Such corporate actions are used to gain access to new technologies and customers. That said, integrating a newly purchased entity can be disruptive to ongoing business. Investors should monitor this type of activity closely.
Riverbed Technology is also subject to a number of laws and regulations. This is most relevant to the 45% of its sales derived from foreign markets in 2011. Indeed, there are material limitations imposed on technology sales to foreign nations. A failure to conform to industry regulations could materially impact the company’s top and bottom lines.
The shift toward network computing is material and ongoing. Riverbed appears to have a solid position in helping companies better manage their networks as part of this transition. Interested subscribers should consult Value Line’s regular quarterly reports for this company to keep tabs on its current and prospective business. Note that supplemental reports highlighting important news as it occurs are also important to watch for.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.