Riverbed Technology (NASDAQ:RVBD), the IT performance company, today reported financial results for its first quarter ended March 31, 2010 (Q1’10). Revenues for Q1’10 were $112.4 million, up 27% compared to the first quarter of fiscal year 2009 (Q1’09).

Reporting on a GAAP basis, net income for Q1’10 was $1.1 million, or $0.01 per diluted share. This compares to GAAP net income of $1.0 million, or $0.01 per share, in Q1’09.

Non-GAAP net income for Q1’10 was $14.8 million, or $0.20 per diluted share, as compared to non-GAAP net income for Q1’09 of $9.2 million, or $0.13 per share. A reconciliation between GAAP and non-GAAP information is contained in the tables below.

“We are pleased with the strong results we generated in the first quarter,” said Jerry M. Kennelly, Riverbed® president and CEO. “We executed well, achieving 27 percent year-over-year revenue growth and a 73 percent increase in non-GAAP operating profit. Product sales increased 24 percent over the prior year led by solid growth in enterprise sales.” Kennelly added, “WAN optimization continues to be a spending priority as organizations consolidate and virtualize their IT infrastructure, while maintaining a focus on cost efficiency.”

Q1’10 Financial Highlights
  • Revenue increased 27% year-over-year
  • Non-GAAP net income increased 61% year-over-year
  • Non-GAAP gross margin increased to 77.1% from 75.7% in Q1’09
  • Non-GAAP operating margin increased to 20.8% from 15.2% in Q1’09
  • Days sales outstanding decreased to 34 days from 44 in Q1’09
  • Deferred revenue increased 17% sequentially to $101 million
  • Cash flow from operations increased to $50 million
  • Cash, short-term and long-term investments grew to $387 million
  • Total assets increased to $561 million

Q1’10 Business Highlights
  • Identified as the WAN optimization controller Advanced Platform worldwide market share leader for Q4’09 and calendar year 2009 based on revenue in the Gartner report, "Market Share: Application Acceleration Equipment, Worldwide, 4Q’09 and 2009" published by Joe Skorupa, Nhat Pham on March 19, 2010.
  • Announced highest marks from TheInfoPro in its "Networking Study Vendor Performance Report Wave 6." Riverbed received a score of "Excellent" in five categories - strategic vision, technical vision, product quality, product performance and delivery as promised to customers.
  • Implemented a two-tier distribution strategy in North America, with the announcement of Arrow Enterprise Computing Solutions and Avnet Technology Solutions as Riverbed value added distributors (VADs).
  • Introduced the Steelhead® 7050, the largest, most scalable data center to data center box in the market.
  • Launched Cascade® 8.4 to offer the first fully integrated WAN optimization and application performance management solution in the market, enabling organizations to better analyze and accelerate network performance.
  • Became the first WAN optimization vendor to achieve SVVP validation for Windows Server 2008 R2.

Conference Call

Riverbed will host a conference call today, April 22, 2010, at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss its first quarter 2010 results and outlook for the second quarter of 2010. The call will be broadcast live over the Internet at www.riverbed.com/investors. A replay of the conference call will also be available via webcast for 12 months.

Forward Looking Statements

This press release contains forward-looking statements, including statements related to WAN optimization as an IT spending priority. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include our ability to react to trends and challenges in our business and the markets in which we operate; our ability to anticipate market needs or develop new or enhanced products to meet those needs; the adoption rate of our products; our ability to establish and maintain successful relationships with our distribution partners; our ability to compete in our industry; fluctuations in demand, sales cycles and prices for our products and services; shortages or price fluctuations in our supply chain; our ability to protect our intellectual property rights; general political, economic and market conditions and events; and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission. More information about these and other risks that may impact Riverbed’s business are set forth in our Form 10-K filed for the year ended December 31, 2009. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements. Any future product, feature or related specification that may be referenced in this release are for information purposes only and are not commitments to deliver any technology or enhancement. Riverbed reserves the right to modify future product plans at any time.

Use of Non-GAAP Financial Information

To supplement our financial results presented in accordance with Generally Accepted Accounting Principles (GAAP), this press release and the accompanying tables and the related earnings conference call contain certain non-GAAP financial measures that we believe are helpful in understanding our past financial performance and future results. For reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section of the accompanying tables titled, “GAAP to Non-GAAP Reconciliations.” Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand and manage our business and forecast future periods. Our non-GAAP financial measures include adjustments based on the following items, as well as the related income tax effects and adjustments related to our tax valuation allowance:

Support deferred revenue: Business combination accounting rules require us to account for the fair value of support contracts assumed in connection with our acquisitions. The book value of our deferred support revenue was reduced by approximately $2.0 million in the adjustment to fair value. Because these are typically one-year contracts, our GAAP revenues for the one year period subsequent to the acquisition of a business do not reflect the full amount of service revenues on assumed support contracts that would have otherwise been recorded by the acquired entity. The non-GAAP adjustment is intended to reflect the full amount of such revenues. We believe this adjustment is useful to investors as a measure of the ongoing performance of our business because we have historically experienced high renewal rates on support contracts, although we cannot be certain that customers will renew these contracts.

Stock-based compensation expenses: We have excluded the effect of stock-based compensation and stock-based payroll expenses from our non-GAAP operating expenses and net income measures. Although stock-based compensation is a key incentive offered to our employees, we continue to evaluate our business performance excluding stock-based compensation expenses. Stock-based compensation expenses will recur in future periods.

Amortization of intangible assets: We have excluded the effect of amortization of intangible assets from our non-GAAP net income. Amortization of intangible assets is a non-cash expense, and it is not part of our core operations. Investors should note that the use of intangible assets contributed to revenues earned during the periods presented and will contribute to future period revenues as well.

Acquisition related and other expenses: We incurred significant expenses in connection with our acquisition of Mazu and also incurred certain other operating expenses, which we would not have otherwise incurred in the periods presented as a part of our continuing operations. Acquisition related and other expenses consist of transaction costs, costs for transitional employees, other acquired employee related costs, integration related professional services, and adjustments to the fair value of the acquisition related contingent consideration. We believe it is useful for investors to understand the effects of these items on our total operating expenses.

About Riverbed

Riverbed Technology is the IT performance company. The Riverbed family of wide area network (WAN) optimization solutions liberates businesses from common IT constraints by increasing application performance, enabling consolidation, and providing enterprise-wide network and application visibility -- all while eliminating the need to increase bandwidth, storage or servers. Thousands of companies with distributed operations use Riverbed to make their IT infrastructure faster, less expensive and more responsive. Additional information about Riverbed (NASDAQ:RVBD) is available at www.riverbed.com.

Riverbed Technology, Riverbed, Steelhead, RiOS, Interceptor, Think Fast, the Riverbed logo, Mazu, Profiler and Cascade are trademarks or registered trademarks of Riverbed Technology, Inc. All other trademarks used or mentioned herein belong to their respective owners.
Riverbed Technology, Inc.
GAAP Condensed Consolidated Statements of Operations
In thousands, except per share amounts
Unaudited
     
Three months ended
March 31,
2010 2009
Revenue:
Product $ 74,737 $ 60,465
Support and services   37,686     27,746  
Total revenue 112,423 88,211
 
Cost of revenue:
Cost of product 16,632 14,405
Cost of support and services   11,234     8,509  
Total cost of revenue 27,866 22,914
   
Gross profit 84,557 65,297
 
Operating expenses:
Sales and marketing 50,068 40,786
Research and development 18,885 16,038
General and administrative 10,746 8,993
Acquisition-related costs   2,725     1,520  
Total operating expenses 82,424 67,337
   
Operating income (loss) 2,133 (2,040 )
 
Other income, net 115 638
   
Income (loss) before provision for income taxes 2,248 (1,402 )
Provision (benefit) for income taxes 1,165 (2,376 )
   
Net income $ 1,083   $ 974  
 
Net income per share, basic $ 0.02 $ 0.01
Net income per share, diluted $ 0.01 $ 0.01
 
Shares used in computing basic net income per share 70,569 68,728
Shares used in computing diluted net income per share 74,876 70,041
 
Riverbed Technology, Inc.
GAAP to Non-GAAP Reconciliation
In thousands, except per share amounts
Unaudited
      Three months ended
GAAP to Non-GAAP Reconciliations: March 31,   December 31,   March 31,
2010 2009   2009
 
Reconciliation of Gross Margin:
U.S. GAAP as reported 75.2 % 75.4 % 74.0 %
Adjustments:
Stock-based compensation (1) 1.2 % 1.2 % 1.3 %
Amortization on intangibles (3)   0.7 %   0.7 %   0.4 %
As Adjusted   77.1 %   77.3 %   75.7 %
 
Reconciliation of Operating Income (Loss):
U.S. GAAP as reported $ 2,133 $ 563 $ (2,040 )
Adjustments:
Stock-based compensation (1) 15,450 15,787 12,782
Payroll tax on stock-based compensation (2) 424 172 26
Amortization on intangibles (3) 1,195 1,195 526
Acquisition-related costs (credits) (4) 4,156 6,040 1,887
Deferred revenue adjustment (5)   -     313     316  
As Adjusted $ 23,358   $ 24,070   $ 13,497  
 
Reconciliation of Operating Margin:
U.S. GAAP as reported 1.9 % 0.5 % -2.3 %
Adjustments:
Stock-based compensation (1) 13.7 % 13.9 % 14.4 %
Payroll tax on stock-based compensation (2) 0.4 % 0.2 % 0.0 %
Amortization on intangibles (3) 1.1 % 1.1 % 0.6 %
Acquisition-related costs (credits) (4) 3.7 % 5.3 % 2.1 %
Deferred revenue adjustment (5)   0.0 %   0.3 %   0.4 %
As Adjusted   20.8 %   21.3 %   15.2 %
 
Reconciliation of Net Income:
U.S. GAAP as reported $ 1,083 $ 932 $ 974
Adjustments:
Stock-based compensation (1) 15,450 15,787 12,782
Payroll tax on stock-based compensation (2) 424 172 26
Amortization on intangibles (3) 1,195 1,195 526
Acquisition-related costs (credits) (4) 4,156 6,040 1,887
Deferred revenue adjustment (5) - 313 316
Income tax adjustments (6)   (7,504 )   (8,368 )   (7,295 )
As Adjusted $ 14,804   $ 16,071   $ 9,216  
 
Reconciliation of Net Income per share, diluted:
U.S. GAAP as reported $ 0.01 $ 0.01 $ 0.01
Adjustments:
Stock-based compensation (1) 0.21 0.21 0.17
Amortization on intangibles (3) 0.02 0.02 0.01
Acquisition-related costs (credits) (4) 0.06 0.08 0.03
Deferred revenue adjustment (5) - - 0.01
Income tax adjustments (6)   (0.10 )   (0.11 )   (0.10 )
As Adjusted $ 0.20   $ 0.21   $ 0.13  
 
Non-GAAP Net income per share, basic $ 0.21 $ 0.23 $ 0.13
Non-GAAP Net income per share, diluted (7) $ 0.20 $ 0.21 $ 0.13
 
Shares used in computing basic net income per share 70,569 69,695 68,728
Shares used in computing diluted net income per share (7) 74,876 76,134 71,306
 
Non-GAAP adjustments:
Support and services revenue $ - $ 313 $ 316
Cost of product 865 863 421
Cost of support and services 1,284 1,257 1,023
Sales and marketing 7,789 8,140 6,338
Research and development 4,750 4,566 3,303
General and administrative 3,812 3,817 2,616
Other acquisition costs (credits) 2,725 4,551 1,520
Provision for income taxes   (7,504 )   (8,368 )   (7,295 )
Total Non-GAAP Adjustments $ 13,721   $ 15,139   $ 8,242  
 
       
(1 ) Stock-based compensation expense is calculated in accordance with the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 718, Compensation - Stock Compensation effective January 1, 2006.
(2 ) Payroll tax on stock-based compensation represents the incremental cost for employer payroll taxes on stock option exercises and restricted stock units vested and released.
(3 ) The intangible assets recorded at fair value as a result of our acquisition are amortized over the estimated useful life of the respective asset.
(4 ) We incurred expenses, such as revaluation of the contingent consideration, in connection with our acquisition, which would not have otherwise occurred in the period presented as part of our operating expenses; therefore, these costs or credits are excluded from our non-GAAP operating expenses.
(5 ) Business combination accounting rules require us to account for the fair value of deferred revenue assumed in connection with an acquisition. The non-GAAP adjustment is intended to reflect the full amount of support and service revenue that would have otherwise been recorded by the acquired entity.
(6 ) The non-GAAP tax rate excludes the income tax effects of non-GAAP adjustments. Additionally, the non-GAAP tax rate does not assume a valuation allowance on our deferred tax assets.
(7 )

Non-GAAP diluted earnings per share and non-GAAP diluted weighted average shares outstanding were calculated excluding the effects of expensing stock options under ASC Topic 718 for the periods ended March 31, 2009 and December 31, 2009.
 
Riverbed Technology, Inc.
Condensed Consolidated Balance Sheets
In thousands
Unaudited
    March 31,   December 31,
2010   2009
 
ASSETS
Current assets:
Cash and cash equivalents $ 65,840 $ 67,749
Short-term investments 304,514 257,938

 
Trade receivables, net 43,020 48,468
Inventory 6,705 9,742
Deferred tax assets 9,725 9,451
Prepaid expenses and other current assets   17,250     16,816  
Total current assets   447,054     410,164  
 
Long-term investments 16,993 -

 
Fixed assets, net 20,960 21,698
Goodwill 11,312 11,312
Intangible assets, net 18,194 19,389
Deferred tax assets, non-current 42,530 38,619
Other assets 3,894 4,097
   
Total assets $ 560,937   $ 505,279  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,121 $ 19,053
Accrued compensation and related benefits 21,806 18,692
Other accrued liabilities 34,766 25,976
Deferred revenue   77,840     64,478  
Total current liabilities   153,533     128,199  
 
Deferred revenue, non-current 23,218 21,972
Other long-term liabilities   2,968     2,801  
Total long-term liabilities   26,186     24,773  
 
 
Stockholders' equity:
Common stock 395,286 367,236
Accumulated deficit (13,766 ) (14,849 )
Accumulated other comprehensive loss   (302 )   (80 )
Total stockholders' equity   381,218     352,307  
 
   
Total liabilities and stockholders' equity $ 560,937   $ 505,279  
 
Riverbed Technology, Inc.
Condensed Consolidated Statements of Cash Flows
In thousands
Unaudited
    Three months ended
March 31,
2010   2009
Operating activities:
Net income $ 1,083 $ 974

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 3,068 2,674
Stock-based compensation 15,450 12,782
Deferred taxes (4,170 ) (3,009 )
Excess tax benefit from employee stock plans (1,486 ) (91 )
Changes in operating assets and liabilities:
Trade receivables 5,448 6,398
Inventory 3,038 2,440
Prepaid expenses and other assets (237 ) (60 )
Accounts payable 1,487 (1,747 )
Accrued and other liabilities 4,990 1,626
Acquisition-related contingent consideration 4,156 510
Income taxes payable 2,992 (91 )
Deferred revenue   14,608     4,650  
Net cash provided by operating activities 50,427 27,056
 
Investing activities:
Capital expenditures (2,549 ) (2,216 )
Purchase of available for sale securities (116,075 ) (107,495 )
Proceeds from maturities of available for sale securities 52,468 67,197
Proceeds from sales of available for sale securities - 5,000
Acquisitions, net of cash acquired   -     (20,469 )
Net cash used in investing activities (66,156 ) (57,983 )
 
Financing activities:

Proceeds from issuance of common stock under employee stock plans, net of repurchases
12,533 1,326
Payments for repurchases of common stock - (10,019 )
Payment of debt assumed in acquisition - (5,004 )
Excess tax benefit from employee stock plans   1,486     91  
Net cash provided by (used in) financing activities 14,019 (13,606 )
Effect of exchange rate changes on cash and cash equivalents   (199 )   (114 )
Net decrease in cash and cash equivalents (1,909 ) (44,647 )
Cash and cash equivalents at beginning of period   67,749     95,378  
Cash and cash equivalents at end of period $ 65,840   $ 50,731  
 
Riverbed Technology, Inc.
Supplemental Financial Information
In thousands

Unaudited
  Three months ended
  March 31,   December 31,   March 31,
2010 2009   2009
Revenue by Geography
 
 
United States $ 58,311 $ 64,998 $ 48,304
Europe, Middle East and Africa 31,413 29,971 24,338
Rest of the world   22,699     17,930     15,569  
Total revenue $ 112,423   $ 112,899   $ 88,211  
 
As a percentage of total revenues:
United States 52 % 58 % 55 %
Europe, Middle East and Africa 28 % 27 % 28 %
Rest of the world   20 %   15 %   17 %
Total revenue   100 %   100 %   100 %
 
Revenue by Sales Channel
 
Direct $ 9,296 $ 7,278 $ 7,765
Indirect   103,127     105,621     80,446  
Total revenue $ 112,423   $ 112,899   $ 88,211  
 
As a percentage of total revenues:
Direct 8 % 6 % 9 %
Indirect   92 %   94 %   91 %
Total revenue   100 %   100 %   100 %

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