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RVBD > SEC Filings for RVBD > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for RIVERBED TECHNOLOGY, INC.

Form 10-Q for RIVERBED TECHNOLOGY, INC.


1-May-2014

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," "would,""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 on May 23, 2002 and are a leader in application performance infrastructure. Riverbed enables organizations to embrace location-independent computing through the Riverbed Application Performance Platform, a set of integrated solutions that give companies the flexibility to host applications and data in the locations that best serve the business while ensuring the flawless delivery of those applications to better leverage global resources, radically reduce the cost of running their business, and maximize employee productivity. Riverbed's solutions dramatically improve application performance, reduce IT costs, and substantially increase business agility. We have two product lines:
•Application Acceleration product line, which includes our wide area network (WAN) optimization products, including Steelhead and SteelFusion (formerly Granite), our Stingray virtual application delivery controllers (ADCs), and our Whitewater cloud storage delivery products; and
•Performance Management product line, which includes our application-aware network performance management (NPM), application performance management (APM), network engineering, operations and planning (NEOP), and network simulation and modeling products. The Performance Management product line combines our former Cascade products and the products acquired from OPNET Technologies, Inc. (OPNET). We are headquartered in San Francisco, California. Our personnel are located throughout the U.S. and in more than 35 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:
• Enhance our customers' performance - Riverbed is the performance company. Our vision is to provide the most complete platform for location independent computing to ensure flawless application performance and the best user experience. This will allow customers to turn distance and location into competitive advantage by letting business objectives - not technical constraints - drive where and how applications and data are hosted and delivered for optimal business performance. 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 and reliable access to applications and data for our customers. We intend to enhance our position as a leader and innovator in the WAN optimization, branch converged infrastructure, application delivery controller and performance management markets. We also intend to continue to sell new capabilities, such as our solutions oriented toward cloud environments, into our installed base and to new customers. Continuing investments in research and development are critical to maintaining our technological advantage.


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• Transform from a single-product to platform company - We have introduced enhancements to our product capabilities in order to address our customers' size and application requirements. We have also introduced new products to extend our market and utilize our technology platform to extend our capabilities.

• Extend our technology partner ecosystem - We work with a broad and diverse ecosystem of partners to extend the value of our platform and deliver a range of implementation, integration and value added services. We have enhanced our product capabilities via integration of and interoperability with partner technologies.

• 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 sell our products directly through our sales force and indirectly through channel partners. We intend to leverage, innovate and grow our sales force and 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, in March 2013, we 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 by integrating performance acceleration and performance management solutions, 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, storage delivery, APM, NPM, and ADC markets, our ability to continue to attract new customers in those markets and our ability to 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 typically 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 $1.0 billion dollars in 2013. Revenue grew by 8% in the three months ended March 31, 2014 to $265.4 million from $246.1 million in the three months ended March 31, 2013. We believe that our revenue growth is a positive sign that our products, support and services 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 components of each of these expense categories. 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 $22.0 million and $24.9 million in the three months ended March 31, 2014 and 2013, respectively. We expect to incur increasing stock-based compensation expense as we expect stock-based compensation to continue to play an important part in the overall compensation structure for our employees.

Seasonality
Our operating results may be affected by seasonal buying patterns. Historically, we have experienced a stronger seasonal revenue cycle in the fourth fiscal quarter and lowest in our first fiscal quarter.


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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 that we make and 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, and inventory valuation. 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, 2013 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, 2014, compared to those discussed in our Form 10-K for the year ended December 31, 2013.


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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 Application Acceleration and Performance Management products and is typically recognized upon delivery. Support revenue provides customers the right to receive unspecified software product upgrades, maintenance releases issued when-and-if-available during the support period, hardware repair, and access to technical support personnel. Support revenue is recognized ratably over the contractual period, which is typically one to three years. Service revenue includes professional services and training and is recognized as the services are performed.

                                     Three months ended
                                          March 31,
(in thousands)                       2014          2013
Total Revenue                     $ 265,416     $ 246,139
Total Revenue by Type:
Product                           $ 150,161     $ 148,040
Support and services              $ 115,255     $  98,099
% Revenue by Type:
Product                                  57 %          60 %
Support and services                     43 %          40 %
Total Revenue by Geography:
United States                     $ 152,962     $ 150,597
Other Americas                    $   7,856     $   7,545
Americas                          $ 160,818     $ 158,142
Europe, Middle East and Africa    $  69,030     $  57,834
Asia Pacific                      $  35,568     $  30,163
% Revenue by Geography:
United States                            58 %          61 %
Other Americas                            3 %           3 %
Americas                                 61 %          64 %
Europe, Middle East and Africa           26 %          23 %
Asia Pacific                             13 %          13 %
Total Revenue by Product Line:
Application Acceleration          $ 204,456     $ 184,962
Performance Management            $  60,960     $  61,177
% Revenue by Product Line:
Application Acceleration                 77 %          75 %
Performance Management                   23 %          25 %
Total Revenue by Sales Channel:
Direct                            $  31,400     $  48,969
Indirect                          $ 234,016     $ 197,170
% Revenue by Sales Channel:
Direct                                   12 %          20 %
Indirect                                 88 %          80 %

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013:
Revenue increased by 7.8% in the three months ended March 31, 2014 as compared to the prior year period. Product revenue increased by 1.4% in the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, which was primarily due to an increase in unit volume. As of March 31, 2014, our products have been sold to over 25,000 customers, compared to over 23,000 customers as of March 31, 2013.


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Substantially all of our customers purchase support when they purchase our products. Support and services revenue increased 17.5% in the three months ended March 31, 2014, as compared to the same period in the prior year due primarily to growth in our customer base. Support and services revenue as a percentage of total revenues increased over the prior year due primarily to growth in our customer base. As our customer base grows, we expect our revenue generated from support and services to increase.
In the three months ended March 31, 2014, we derived 88% of our revenue from indirect channels compared to 80% for the three months ended March 31, 2013. The increase in revenue from indirect channels is primarily due to the conversion of the customers acquired from OPNET to relationships with our channel partners. We expect indirect channel revenue to continue to represent a substantial majority of our revenue.
We generated 42% of our revenue in the three months ended March 31, 2014 from international locations, compared to 39% in the three months ended March 31, 2013. The increase in international revenue as a percent of total revenue was due primarily to a higher proportion of European-based sales. 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.

Cost of Revenue and Gross Margin
Cost of product revenue consists of the personnel costs of manufacturing management, 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 and manufacture of our appliance hardware, embed our proprietary software on our appliance hardware 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)                             2014          2013
Cost of revenue:
Cost of product                         $  38,281     $  40,900
Cost of support and services               31,631        28,042
Total cost of revenue                   $  69,912     $  68,942

Gross profit:                           $ 195,504     $ 177,197

Gross margin for product:                      75 %          72 %
Gross margin for support and services          73 %          71 %
Total gross margin                             74 %          72 %

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013: The total cost of product revenue decreased $2.6 million, or 6.4%, in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, due primarily to a decrease in product costs of $0.5 million and a decrease in the amortization of acquisition-related intangible assets of $0.8 million. Cost of support and services revenue increased $3.6 million, or 12.8%, due primarily to increased logistics and spare parts costs and higher headcount and payroll related costs to support the growth in installed base. Gross margin increased to 74% in the three months ended March 31, 2014 as compared to 72% in the three months ended March 31, 2013. Product gross margin increased to 75% in the three months ended March 31, 2014 from 72% in the three months ended March 31, 2013 primarily as a result of a decrease in amortization of the acquisition-related intangible assets.


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Gross margins for support and services increased to 73% in the three months ended March 31, 2014 from 71% in the three months ended March 31, 2013. Gross margin for support and services was positively impacted by the growth in support revenue due to an increased installed base. Additionally, the gross margin in the first quarter of 2013 was impacted by the reduction to service revenue related to the fair value adjustment to the deferred support revenue as required by the business combination accounting for 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 further leveraging 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 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 margin 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)                  2014          2013
Sales and marketing expenses   $ 114,745     $ 115,721
Percent of total revenue              43 %          47 %

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013: Sales and marketing expenses decreased by $1.0 million, or 0.8%, in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to decreases in amortization of the intangibles acquired in the OPNET acquisition of $3.5 million, offset by increases in information technology and facilities of $1.0 million and increases in marketing-related programs and travel of $0.5 million.
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)                       2014          2013
Research and development expenses   $  50,647     $ 48,961
Percent of total revenue                   19 %         20 %

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013: R&D expenses increased by $1.7 million, or 3.4%, in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to increases in facility expenses of $1.0 million.


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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)                         2014          2013
General and administrative expenses   $  19,125     $ 19,114
Percent of total revenue                      7 %          8 %

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013: G&A expenses were flat in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to a decrease in personnel costs of $2.2 million as a result of our workforce rationalization from the OPNET acquisition, offset by increases in outside services related to litigation of $1.3 million and increases in professional service fees related to non-routine corporate governance and shareholder matters of $0.5 million. The increase in litigation expenses was primarily due to the defense of our intellectual property.
Acquisition-Related Costs
Acquisition-related costs include transaction costs and integration costs. Transaction costs include advisory, legal and other professional fees directly associated with concluding an acquisition. Integration related costs include integration project management consulting, acquired employee retention bonuses, one-time termination benefits, facility exit costs and other non-recurring, or redundant costs to integrate an acquired company into Riverbed's systems and operations. We expect to continue to incur integration costs primarily associated with our facilities rationalization and sales force integration plans, but expect the ongoing costs to be lower than in prior quarters. The following table summarizes the acquisition-related costs, including transaction costs and integration-related costs in the periods presented:

Three months ended
March 31,
(in thousands) 2014 2013 Acquisition-related costs $ 2,668 $ 4,136

Quarter Ended March 31, 2014 Compared to Quarter Ended March 31, 2013: During the three months ended March 31, 2014, we recorded acquisition-related costs of $2.7 million, primarily related to integration-related costs associated with our acquisition of OPNET. We expect to continue to incur integration costs primarily associated with our facilities rationalization and sales force integration plans, but expect the ongoing costs to be lower than in prior quarters. Interest and Other Expense, Net
Interest and other expense, net, consists primarily of interest income on our cash and marketable securities, interest expense, and foreign currency exchange gains or losses.

                                               Three months ended
                                                   March 31,
(in thousands)                                 2014          2013
Interest income                             $     243     $    204
Interest expense                               (2,857 )     (6,280 )
Foreign exchange gains (losses) and other         (99 )       (288 )
Total interest and other expense, net       $  (2,713 )   $ (6,364 )

Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013:
Interest and other expense, net, decreased in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to the decrease in interest expense resulting from the refinancing of our borrowings in the fourth quarter of 2013, which decreased our rate of interest.


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Provision for (Benefit from) Income Taxes Our provision for (benefit from) income taxes is based on our estimated annual effective tax rate, adjusted for discrete tax items recorded in the period. The . . .

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