Shareholders in networking equipment stocks, like Riverbed Technology (Nasdaq: RVBD), F5 Networks (Nasdaq: FFIV), Juniper Networks (Nasdaq: JNPR) and Blue Coat Systems (Nasdaq: BCSI), now have some idea what it's like to be the chew-toy of a Great Dane puppy. The wild swings of the past two years, both in the businesses and the stocks, have left them shaken, chewed up and perhaps even covered with slobber. While the third quarter report out of Riverbed may look like good news, and indeed there are certainly some positives to this story, investors should be a little cautious before fully buying into this name.
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A Solid Third Quarter
Riverbed hasn't really disappointed in a while, but investors have been put off in prior quarters by shortfalls, relative to whisper numbers and guidance that wasn't as ebullient as valuation would seem to demand. Nevertheless, Riverbed delivered 28% annual revenue growth this quarter, with 12% growth on a sequential basis.

Margin performance was not bad either. Gross margin did tick down just a bit from last year, but stands at a strong 76.3%. Operating margin is about 13% on a reported basis, but adjusting for acquisition costs, drives that figure up to 29.7%. Unlike many tech names these days, Riverbed's operating margin compression had more to do with increased R&D spending, than higher marketing costs. (To know more about operating margin, check out: Analyzing Operating Margins. )

Now the Worrisome Bit
Though investors cheered the 28% revenue growth this quarter, there is at least one reason to worry, and maybe two. For starters, revenue was helped by a rebound in the EMEA region, an area that previously underperformed due to the loss of the sales head for that region. Consequently, some of that rebound in growth should have been expected, if that prior excuse was valid.

More worrying is the contribution from government spending. Government-based revenue jumped about 100% on a sequential basis and climbed 65%, from last year's level, and made up more than one-quarter of sales. While it is true that the government's money is just as green as anybody else's, government revenue can be erratic; just ask Cisco Systems (Nasdaq: CSCO). Along these lines, sales to enterprise customers were down almost 4% sequentially, a number that should concern investors in this sector, as well as investors in other enterprise vendors, like International Business Machine (NYSE: IBM) or EMC (NYSE: EMC).

Still Waiting on the Competition
Although Riverbed has an impressive market share lead over Cisco, Cisco has made comments recently to the effect that, they know they are lagging and they intend to do something about it. Even with Cisco's recent underperformance, no company should rest completely easy, if Cisco is targeting them.

Fortunately, Riverbed is not helpless. The company continues to develop new products for the data center and workplace markets, and recent acquisitions should fuel further sales growth. On top of that, with virtualization such a hot trend, there is ample money to go around. Don't forget, too, that Riverbed has initiatives underway, with
VMware (NYSE: VMW) and Akamai Technologies (Nasdaq: AKAM), that should help protect some of its business.

All in all, Riverbed is in a good competitive space. Blue Coat is in trouble, Citrix Systems (Nasdaq: CTXS) is barely interested in this space, and Cisco and Juniper have generally been more interested in an integrated router strategy. Still, this is tech we're talking about and nobody is ever so far away from obsolescence that they can rest completely easy.

The Bottom Line
A big question for Riverbed shareholders is whether government revenue is reproducible and/or replaceable with enterprise revenue. Keep in mind, too, that while this stock has come off sharply from its highs, it's still not exactly what many investors would deem "cheap." Riverbed looks like a good rebound trade for those with conviction that enterprise growth will materialize, but investors thinking about Riverbed should at least consider F5 and/or Juniper before making a full plunge into Riverbed.

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Tickers in this Article: RVBD, FFIV, JNPR, BCSI, IBM, EMC, VMW, AKAM

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