There's a lot more to the tech space than just the consumer side. Behind the scenes, companies are building new state of the art infrastructure and a new generation of software...some better than others, notes Rob DeFrancesco of Tech Stock Prospector.
I hope it’s not a bad omen that Riverbed Technology (RVBD) picked the day that Hurricane Sandy slammed into the East Coast to announce its nearly $1 billion acquisition of OPNET (OPNT), a provider of solutions used to monitor applications and networks.
I will say this is a strategically sound deal because it immediately broadens Riverbed’s product portfolio into a fast-growing adjacent market that complements the core WAN optimization business. Riverbed already has half of the WAN optimization market, and needs more growth drivers than just stealing share from Cisco Systems' (CSCO) 22% of the market, as well as from a bunch of smaller players.
The acquisition quickly gets Riverbed up to speed in application performance monitoring (APM), an important growth segment experiencing strong demand caused by the build-out of the software-as-a-service (SaaS) market. The cloud demands more in-depth application monitoring. And APM solutions will only see greater uptake as software defined networking (SDN) takes hold.
OPNET’s APM business, which accounts for 73% of the company’s product bookings, is growing more than 30% annually. IT research firm Gartner rates OPNET’s APM solutions among the best in the business.
OPNET brings with it a talented pool of direct sales reps and engineers focused solely on APM and network performance management (NPM). OPNET will be combined with Riverbed’s Cascade NPM business to form a unit with more than $250 million in revenue.
The Cascade business was a standout performer for Riverbed in the third quarter, with revenue up 45% year over year to $17 million, but it’s still a small piece of the overall top line. OPNET’s solutions are generally considered to offer higher performance and better scalability.
Riverbed management did not want to wait for the Cascade business to ramp up, deciding it necessary to seize the momentum in the APM/NPM markets right now instead of churning away on R&D to build up a presence.
Riverbed will be able to deploy its extensive indirect channel to cross sell OPNET’s APM solutions into its installed customer base, particularly on the international front (75% of OPNET’s revenue comes from North America). From a vertical perspective, OPNET has a particularly strong US federal business, which should help Riverbed further penetrate this important segment. In Q3, the government vertical accounted for 20% of Riverbed’s revenue.
|pagebreak|As for the risks involved in this deal, there are a few. Every tech acquisition sounds good on paper, but they all involve a lot of challenges from an integration perspective. This is by far the largest purchase Riverbed management has taken on.
While I have no doubt the team is up to the challenge, there are always negative variables that threaten to gum up the works, particularly during the first few quarters of the integration process. First off, OPNET’s NPM business is a slow grower that has been underperforming for quite some time. Also, OPNET’s operating margin of 19% is well below Riverbed’s Q3 margin of 29%.
While Riverbed management still thinks the company is on track to reach a 30% operating margin, this deal elevates the risk of missing that target. This is a significant acquisition any way you slice it, with OPNET doing roughly 25% of Riverbed’s revenue on a quarterly basis.
Riverbed just went through a major product refresh and introduction wave, and will now have even more moving parts. From a financial perspective, Riverbed is taking out a $500 million term loan to help finance the deal, so that ratchets up the risk from a financial perspective.
The company will still have roughly $300 million in cash and investments on the balance sheet after the purchase. I’d be more concerned about this deal if Riverbed’s core business was faltering. While there was a bit of a stumble earlier this year, Q3 looked to be back on track, with revenue up 15%, driven by a 21% increase in enterprise sales.
Management said the funnel of new business going into Q4 was the best it has ever seen, and issued upbeat top-line guidance for the December quarter of $230 million to $236 million, vs. the consensus at the time of $232.6 million.
The acquisition is expected to add to earnings next year and provide meaningful revenue synergies in 2014. But the Riverbed management team needs to execute to perfection to make this deal work.
Subscribe to Tech Stock Prospector here...
Related Reading:
