A Hot End to the Year
Riverbed definitely exited 2010 on a hot streak. Revenue rose 12% sequentially and 47% from the prior year, due in large part to ongoing demand for the company's Steelhead appliances. Product sales rose 52% for the quarter, and the company continued to gain share in the market. In fact, it looks as though Riverbed ended the year with over 40% share in the WAN optimization market.
On the profitability side, things get a little murkier. Gross margin did improve nicely on a sequential and annual basis, and Riverbed is in the enviable position where its product gross margins are higher than service margins. The picture was not so rosy in the op-ex, where substantially higher sales and marketing expenses stripped away a lot of operating leverage. All in all, while the company did beat estimates, a better tax rate had a lot to do with it and that makes this a low-quality earnings beat. (For more, see Can Earnings Guidance Accurately Predict The Future.)
The Road Ahead
Since there is never any shortage of advocacy for small growth tech stocks, it might be more useful to first think about what could go wrong with the Riverbed story. Clearly the operating leverage story is potential worry, but one iffy quarter does not prove that Riverbed lacks leverage.
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