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RVBD > SEC Filings for RVBD > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for RIVERBED TECHNOLOGY, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RIVERBED TECHNOLOGY, INC.


3-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. The information in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include statements related to: our business and strategy, trends affecting our business and financial results, international expansion plans, direct and indirect sales plans and strategies, growth of our revenue, costs and expenses (including sales and marketing expenses), gross margins, our share repurchase program, our acquisitions, the effect of fluctuations in exchange rates and our hedging activities on our financial results, our effective tax rate and our liquidity and capital requirements. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as "may," "will," "could," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this Form 10-Q in the section titled "Risk Factors" and the risks discussed in our other SEC filings. We disclaim any obligation to publicly release any revisions or updates to the forward-looking statements after the date of this Form 10-Q.

Overview
We were founded in May 2002 by experienced industry leaders with a vision to improve the performance of wide-area distributed computing. We began commercial shipments of our Steelhead products in May 2004 and have since sold our products to over 23,000 customers worldwide, including customers resulting from acquisitions. We have two product lines:
•our Application Acceleration product line, which includes our Steelhead appliances directed at the WAN optimization market, and our virtual application delivery controllers (ADCs), web content optimization (WCO), and storage delivery; and
•our Performance Management product line, which includes our application-aware network performance management (NPM) and application performance management (APM) products acquired from OPNET.

We are headquartered in San Francisco, California. Our personnel are located throughout the U.S. and in more than thirty-five countries worldwide. We expect to continue to add personnel in the U.S. and internationally to provide additional geographic sales, research and development, general and administrative and technical support coverage.

The Riverbed Strategy
Our goal is to develop solutions that are widely recognized as the preeminent performance and efficiency standard for organizations of all sizes and geographies. Key elements of our strategy include:
• Build a unified performance platform - Riverbed is the performance company. Our vision is to give customers the tools to create the highest performing IT environment possible, enabling users everywhere to be more productive while giving IT teams greater control over their enterprises' technology resources. Our vision focuses on the intersection of applications, networks, and storage, and brings customers a single, unified view of performance in their distributed environment.

• Maintain and extend our technological advantages - We believe that we offer the broadest ability to enable rapid, reliable access to applications and data for our customers. We intend to enhance our position as a leader and innovator in the WAN optimization, NPM, APM, and virtual ADC markets. We also intend to continue to sell new capabilities, such as our new cloud solutions, into our installed base and to new customers. Continuing investments in research and development are critical to maintaining our technological advantage.

• Enhance and extend our product lines - We plan to introduce enhancements to our product capabilities in order to address our customers' size and application requirements. We also plan to introduce new products to extend our market and utilize our technology platform to extend our capabilities.

• Extend our technology partner ecosystem - We plan to enhance our product capabilities via integration of partner technologies, in particular by increasing the selection of third-party applications on the Riverbed® Virtual Services Platform (VSP).


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• Increase market awareness - To generate increased demand for our products, we will continue to market the effectiveness of our comprehensive IT performance solutions.

• Scale our sales force and distribution channels - We will continue to innovate to grow our revenue and increase market share. We sell our products directly through our sales force and indirectly through channel partners. We intend to expand our direct sales force and leverage our indirect channels to extend our geographic reach and market penetration.

• Enhance and extend our support and services capabilities - On an ongoing basis, we plan to enhance and extend our support and services capabilities to continue to support our growing global customer base. For example, we recently launched Splash, a new feature-rich community site for customers.

Major Trends Affecting Our Financial Results Company Outlook
We believe that our current value proposition, which enables customers to improve the performance of their applications and access to their data across WANs, while also offering the ability to simplify IT infrastructure and realize significant capital and operating cost savings, should allow us to continue to grow our business. Our product revenue growth rate will depend significantly on continued growth in the WAN optimization, APM, NPM, ADC and WCO markets, and our ability to continue to attract new customers in those markets and generate additional sales from existing customers. Our growth in support and services revenue is dependent upon increasing the number of products under support contracts, which is dependent on both growing our installed base of customers and renewing existing support contracts. Our future profitability and rate of growth will be directly affected by the continued acceptance of our products in the marketplace, as well as the timing and size of orders, product mix, average selling prices and costs of our products and general economic conditions. Our ability to achieve profitability in the future will also be affected by the extent to which we must incur additional expenses to expand our sales, support, marketing, development, and general and administrative capabilities to grow our business. The largest component of our expenses is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for sales personnel and stock-based compensation.
Revenue
Our revenue has grown rapidly since we began shipping products in May 2004, increasing from $2.6 million in 2004 to $836.9 million in 2012. Revenue grew by 35% in the three months ended March 31, 2013 to $246.1 million from $182.4 million in the three months ended March 31, 2012. We believe that our revenue growth is a positive sign that our products have a significant value proposition to our customers and that the markets that we compete in are still expanding. Costs and Expenses
Operating expenses consist of sales and marketing, research and development, general and administrative expenses, and acquisition-related costs. Personnel-related costs, including stock-based compensation, are the most significant component of each of these expense categories. As of March 31, 2013, we had 2,614 employees, an increase of 56% from 1,674 employees at March 31, 2012. The increase in employees is the most significant driver behind the increase in costs and operating expenses from the three months ended March 31, 2012 to the three months ended March 31, 2013. The increase in employees was required to support our increased revenue and is primarily due to our acquisitions during the period. The timing and number of additional hires has and could materially affect our operating expenses, both in dollar amount and as a percentage of revenue, in any particular period. Stock-based Compensation Expense
Stock-based compensation expense and related payroll taxes were $24.9 million and $23.7 million in the three months ended March 31, 2013 and 2012, respectively. We expect to continue to incur significant stock-based compensation expense and anticipate further growth in stock-based compensation expense as our employee base grows because we expect stock-based compensation to continue to play an important part in the overall compensation structure for our employees.


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Stock-based compensation expense and related payroll tax was as follows:

                                                                  Three months ended
                                                                      March 31,
(in thousands)                                                   2013            2012
Cost of product                                              $       259     $      254
Cost of support and services                                       1,861          1,643
Sales and marketing                                               10,965          9,503
Research and development                                           7,720          7,364
General and administrative                                         4,114          4,898
Total stock-based compensation expense and related payroll
taxes                                                        $    24,919     $   23,662

Acquisitions

On December 18, 2012, we completed our acquisition of OPNET Technologies, Inc. (OPNET) to extend our NPM business into the APM market. The addition of OPNET's broad-based family of APM products enhances our position in the NPM and APM markets and enables us to provide customers with an integrated solution that both monitors network and application performance and also accelerates it. The total acquisition date fair value of consideration transferred was $980.2 million, which included cash payments of $857.0 million, common stock issued of $122.6 million and the fair value of options assumed of $0.6 million.

The results of operations of OPNET are included in our condensed consolidated results for the periods subsequent to the acquisition date and are part of our Performance Management product line. In the three months ended March 31, 2013, we recognized $45.3 million in revenue, from the sale of the acquired company's products and services and we recognized $41.7 million of operating expenses, which included $20.8 million of acquisition-related intangible amortization.

Seasonality
Our operating results may be affected by seasonal buying patterns. Historically, the third and fourth quarters have been the strongest for us. While the second quarter has traditionally been the weakest for OPNET.

Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our condensed consolidated financial statements could be adversely affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: revenue recognition, accounting for business combinations, stock-based compensation, accounting for income taxes, inventory valuation and allowances for doubtful accounts. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our year ended December 31, 2012 for a more complete discussion of our critical accounting policies and estimates including revenue recognition, accounting for business combinations including the fair value measurement of contingent consideration, goodwill, intangible assets and impairment assessments, stock-based compensation, accounting for income taxes, and inventory valuation. Our critical accounting policies have been discussed with the Audit Committee of the Board of Directors. We believe there have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2013, compared to those discussed in our Form 10-K for the year ended December 31, 2012.


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Results of Operations
Revenue
We derive our revenue from sales of our appliances and software licenses and
from support and services. Product revenue primarily consists of revenue from
sales of our Steelhead, Performance Management, Stingray and Whitewater products
and is typically recognized upon delivery. Support and services revenue includes
unspecified software license updates and product support. Support revenue is
recognized ratably over the contractual period, which is typically one year.
Service revenue includes professional services and training and is recognized as
the services are performed.

                                     Three months ended
                                          March 31,
(in thousands)                       2013          2012
Total Revenue                     $ 246,139     $ 182,413
Total Revenue by Type:
Product                           $ 148,040     $ 117,034
Support and services              $  98,099     $  65,379
% Revenue by Type:
Product                                  60 %          64 %
Support and services                     40 %          36 %
Total Revenue by Geography:
Americas                          $ 158,142     $ 103,657
Europe, Middle East and Africa    $  57,834     $  50,538
Asia Pacific                      $  30,163     $  28,218
% Revenue by Geography:
Americas                                 64 %          57 %
Europe, Middle East and Africa           23 %          28 %
Asia Pacific                             12 %          15 %
Total Revenue by Product Line:
Application Acceleration          $ 184,962     $ 170,235
Performance Management            $  61,177     $  12,178
% Revenue by Product Line:
Application Acceleration                 75 %          93 %
Performance Management                   25 %           7 %
Total Revenue by Sales Channel:
Direct                            $  48,969     $  10,815
Indirect                          $ 197,170     $ 171,598
% Revenue by Sales Channel:
Direct                                   20 %           6 %
Indirect                                 80 %          94 %

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012:
Product revenue increased by 26.5% in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, which was primarily due to acquisitions and an increase in unit volume from increasing sales to existing customers. We believe the market for our products has grown due to increased market awareness of WAN optimization, performance management and ADC, and an increase in distributed organizations, which increases dependence on timely access to data and applications. As of March 31, 2013, our products have been sold to over 23,000 customers, compared to 18,000 customers as of March 31, 2012. As a result of our strategic relationship with Juniper, we continue to recognize approximately $4.0 million of product revenue each quarter. Substantially all of our customers purchase support when they purchase our products. Support and services revenue increased 50.0% in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. As our customer base grows, we expect our revenue generated from support and services to increase.


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In the three months ended March 31, 2013, we derived 80% of our revenue from indirect channels compared to 94% for the three months ended March 31, 2012. We expect indirect channel revenue to continue to be a substantial majority of our revenue.
We generated 39% of our revenue in the three months ended March 31, 2013 from international locations, compared to 47% in the three months ended March 31, 2012. We continue to expand into international locations and introduce our products in new markets and expect international revenue to increase in dollar amount over time.
Revenue by product line consists of Application Acceleration revenue and Performance Management revenue. Application Acceleration revenue increased by $14.0 million, or 8.2%, in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, due to an increase in unit volume from increasing sales to existing customers. We believe the market for our Application Acceleration products has grown due to increased market awareness of WAN optimization and an increase in distributed organizations. Performance Management revenue increased by $55.4 million, or 455%, in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. The increase was primarily due to our acquisition of OPNET, which accounted for $51.7 million of Performance Management revenue in the three months ended March 31, 2013, as well as continued adoption of our NPM products.

Cost of Revenue and Gross Margin
Cost of product revenue consists of the costs of the appliance hardware, manufacturing, shipping and logistics costs, expenses for inventory obsolescence, warranty obligations, and amortization of acquisition-related intangibles. We utilize third parties to assist in the design of and to manufacture our appliance hardware, embed our proprietary software and perform shipping logistics. Cost of support and service revenue consists of personnel costs of technical support and professional services personnel, spare parts and logistics services. As we expand internationally and into other sectors, we may incur additional costs to conform our products to comply with local laws or local product specifications. In addition, as we expand internationally, we will continue to hire additional technical support personnel to support our growing international customer base.
Our gross margin has been and will continue to be affected by a variety of factors, including the mix and average selling prices of our products, new product introductions and enhancements, the cost of our appliance hardware, expenses for inventory obsolescence and warranty obligations, cost of support and service personnel, and the mix of distribution channels through which our products are sold.

                                           Three months ended
                                                March 31,
(in thousands)                             2013          2012
Revenue:
Product                                 $ 148,040     $ 117,034
Support and services                       98,099        65,379
Total revenue                             246,139       182,413
Cost of revenue:
Cost of product                            40,900        27,889
Cost of support and services               28,042        18,782
Total cost of revenue                      68,942        46,671
Gross profit:                           $ 177,197     $ 135,742
Gross margin for product                       72 %          76 %
Gross margin for support and services          71 %          71 %
Total gross margin                             72 %          74 %

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: The total cost of product revenue increased $13.0 million, or 46.7%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, due primarily to an increase in revenue and associated increase in product costs of $4.3 million, or 28.0%, and an increase in the amortization of acquisition-related intangible assets of $8.2 million.
Cost of support and services revenue increased $9.3 million, or 49.3%, as we added more professional services headcount domestically and abroad coupled with increases in freight, duties and taxes, and repair costs to support our growing customer


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base. Support and services headcount was 366 employees, as of March 31, 2013 compared to 209 employees as of March 31, 2012. The increase in headcount was primarily the result of the OPNET acquisition.
Gross margins decreased slightly to 72% in the three months ended March 31, 2013 as compared to 74% in the three months ended March 31, 2012. Product gross margins decreased to 72% in the three months ended March 31, 2013 from 76% in the three months ended March 31, 2012 primarily as a result of an increase in amortization of acquisition-related intangible assets. Gross margins for support and services remained unchanged at 71% due to the elimination of certain redundant transportation and warehousing costs as we converted to a new logistics provider, which costs savings were offset by increased personnel costs primarily associated with increased headcount due to the OPNET acquisition. Sales and Marketing Expenses
Sales and marketing expenses represent the largest component of our operating expenses and include personnel costs, sales commissions, marketing programs and facilities costs. Marketing programs are intended to generate revenue from new and existing customers, and are expensed as incurred. We plan to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

                                  Three months ended
                                      March 31,
($ in thousands)                  2013          2012
Sales and marketing expenses   $ 115,721     $ 73,815
Percent of total revenue              47 %         40 %

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: Sales and marketing expenses increased by $41.9 million, or 56.8%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to increases in personnel costs of $23.4 million. The increase in personnel costs, which include salaries, commissions, bonuses and related benefits and stock-based compensation, primarily due to headcount increasing to 1,137 employees as of March 31, 2013 from 778 employees as of March 31, 2012, was primarily as a result of the OPNET acquisition. The sales and marketing expense is further attributed to increased marketing-related activities and travel and expense of $3.1 million. Intangibles amortization contributed $12.6 million to the increase in sales and marketing expense. Research and Development Expenses
Research and development (R&D) expenses primarily include personnel costs and facilities costs. We expense R&D costs as incurred. We are devoting substantial resources to the continued development of additional functionality for existing products and the development of new products. We intend to continue to invest significantly in our R&D efforts because we believe they are essential to maintaining our competitive position.

                                       Three months ended
                                           March 31,
($ in thousands)                       2013          2012
Research and development expenses   $  48,961     $ 34,111
Percent of total revenue                   20 %         19 %

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: R&D expenses increased by $14.9 million, or 43.5%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to increases in personnel costs of $13.6 million. The increase in personnel costs, which include salaries, bonuses and related benefits and stock-based compensation, was due to headcount increasing to 803 employees as of March 31, 2013 from 471 employees as of March 31, 2012, primarily as a result of the OPNET acquisition.


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General and Administrative Expenses
General and administrative (G&A) expenses consist primarily of compensation for
personnel and facilities costs related to our executive, finance, human
resources, information technology and legal organizations, and fees for
professional services. Professional services include legal, audit and
information technology consulting costs.
                                         Three months ended
                                             March 31,
($ in thousands)                         2013          2012
General and administrative expenses   $  19,114     $ 14,634
Percent of total revenue                      8 %          8 %

Quarter Ended March 31, 2013 Compared to the Quarter Ended March 31, 2012: G&A expenses increased by $4.5 million, or 30.6%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to an increase in salaries, bonuses and related benefits of $2.9 million offset by a $0.7 million decrease in stock compensation expense. The overall increase was primarily due to headcount increasing to 275 employees as of March 31, 2013 from 187 employees as of March 31, 2012, primarily as a result of the OPNET acquisition.

Acquisition-Related Costs
Acquisition-related costs include changes in the fair value of the
acquisition-related contingent consideration, transaction costs and
integration-related costs.
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