Riverbed Technology Reports Record Third Quarter 2012 Revenue and Profits

Revenue grows 10% sequentially and 15% over prior year
Cash and investments exceed $670 million

Riverbed Technology, Inc. (RVBD), the performance company, today reported financial results for its third quarter ended September 30, 2012 (Q3'12).

GAAP revenue for Q3’12 was $219 million, an increase of 10% compared to $198 million in the second quarter 2012 (Q2’12) and an increase of 15% compared to $190 million in the third quarter 2011 (Q3’11). GAAP net income for Q3’12 was $25 million, or $0.15 per diluted share, compared to $18 million, or $0.11 per diluted share, in Q2’12 and $19 million, or $0.12 per diluted share, in Q3’11.

Non-GAAP revenue for Q3’12 was $219 million, an increase of 10% compared to $199 million in Q2’12 and an increase of 15% compared to $191 million in Q3’11. Non-GAAP net income for Q3’12 was $46 million, or $0.28 per diluted share, compared to $37 million, or $0.23 per diluted share, in Q2’12 and $40 million, or $0.24 per diluted share, in Q3’11.

“The results we are announcing today reflect Riverbed’s position as a leader in the evolution to the software defined data center,” said Jerry M. Kennelly, President and CEO. “Sales of new products continued to ramp in the third quarter, and we saw strong enterprise growth as customers embrace Riverbed as a strategic vendor whose products deliver the best performance and highest availability.”

“Healthy revenue growth and good cost control generated record profits,” added Randy S. Gottfried, Chief Financial Officer. “Cash and investments grew by more than $100 million and totaled more than $670 million at September 30, 2012.”

Financial Highlights

• Total revenue increased 10% sequentially and 15% year-over-year to record $219 million
• Product revenue increased 12% sequentially and 9% year-over-year to record $145 million
• Record Non-GAAP gross margin of 79.6%, compared to 77.8% in Q2’12
• Non-GAAP operating profit increased 26% sequentially and 10% year-over-year to record $63 million
• Non-GAAP net income increased 23% sequentially and 15% year-over-year to record $46 million
• Total cash and investments of $670 million at September 30, 2012, compared to $550 million at June 30, 2012, and $559 million at September 30, 2011

Business Highlights

• Upgraded Riverbed® Optimization System (RiOS®), the software that powers the Steelhead® appliance, with the addition of inbound quality of service (QoS). Inbound QoS provides the control needed over all incoming traffic to guarantee stable bandwidth with predictable levels of performance.
• Enhanced strategic relationship with VMware across all Riverbed product solutions
  
  
  • Riverbed Cloud Steelhead will be further integrated with VMware vCloud Director to simplify deployment, configuration, and management of wide area network optimization-as-a-service for the Virtual Data Center
  • Previewed a solution leveraging Riverbed Granite™ edge virtual server infrastructure (edge-VSI) to deliver higher performance for distributed VMware View environments
  • Riverbed Cascade® will support VMware VXLAN providing IT organizations with an application-aware network performance management solution for software defined networking
  • Integrated Riverbed Stingray™ Traffic Manager with VMware vFabric Application Director to allow customers to create application blueprints that can be used to provision and scale multi-tier applications, faster and smarter in a hybrid cloud environment
• Steelhead Cloud Accelerator received the Best of TechEd Award in the Cloud Computing category
• Launched Cascade 9.6 reinforcing commitment to the Federal market
  
  
  • Met the testing requirements of the Joint Interoperability Test Command (JITC), a military organization under the Defense Information Systems Agency (DISA)
  • Achieved Federal Information Processing Standard (FIPS) and the Security Technical Implementation Guide (STIG) validations
  • Reached EAL3+ Evaluation Status under the Common Criteria for Information Technology Security Evaluation and Certification Scheme (CCS)
• Introduced new Whitewater® 3010 cloud storage gateway model appliance that offers four times the local storage capacity of previous models to handle larger backup data workloads for large scale enterprise requirements
• Named one of the Top Workplaces for 2012, according to a survey published by the Bay Area Newspaper Group, which includes the Contra Costa Times, InsideBayArea.com, the Oakland Tribune and the San Jose Mercury News

Conference Call

Riverbed will host a conference call today, October 18, 2012, at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss its third quarter 2012 results. The call will be broadcast live over the Internet at http://www.riverbed.com/investors and a replay of the webcast will be available for 12 months.

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 contain certain non-GAAP financial measures, including non-GAAP revenue, non-GAAP gross margin, non-GAAP operating profit, non-GAAP net income and non-GAAP net income per diluted share, which 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, adjustments related to our tax valuation allowance and the interim tax cost of the one-time transfer of intellectual property rights between Riverbed legal entities:

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 the acquisition deferred support revenue was reduced by $4 million in the adjustment to fair value. Because these are typically one-year contracts, our GAAP revenues for an 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 related payroll tax 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 incur significant expenses in connection with our acquisitions 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 retention costs, integration related professional services, adjustments to the fair value of the acquisition related contingent consideration, the write-down of certain acquired in-progress research and development intangibles, and foreign exchange losses on the acquisition related contingent consideration. We believe it is useful for investors to understand the effects of these items on our total operating expenses.

Forward-Looking Statements

This press release contains forward-looking statements, including statements relating to our strategic and competitive position and the growth of our addressable markets. 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; difficulties encountered in integrating new or acquired businesses and technologies; the inability to identify and realize the anticipated benefits of acquisitions; the expense and impact of legal proceedings; 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 with the SEC for the period ended December 31, 2011, and our subsequent quarterly reports on Form 10-Q filed with the SEC. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we disclaim any 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.

About Riverbed Technology

Riverbed delivers performance for the globally connected enterprise. With Riverbed, enterprises can successfully and intelligently implement strategic initiatives such as virtualization, consolidation, cloud computing, and disaster recovery without fear of compromising performance. By giving enterprises the platform they need to understand, optimize and consolidate their IT, Riverbed helps enterprises to build a fast, fluid and dynamic IT architecture that aligns with the business needs of the organization. Additional information about Riverbed (RVBD) is available at www.riverbed.com

Riverbed and any Riverbed product or service name or logo used herein are trademarks of Riverbed Technology, Inc. All other trademarks used herein belong to their respective owners.

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(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) The inventory fair value adjustment recorded pursuant to our acquisition is excluded from our non-GAAP operating expenses as this cost would not have otherwise occurred in the period presented.

(5) We incurred expenses in connection with our acquisitions, which would not have otherwise occurred in the period presented as part of our operating expenses; therefore, these costs are excluded from our non-GAAP operating expenses.

(6) 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.

(7) The non-GAAP tax rate excludes the income tax effects of non-GAAP adjustments. Additionally, the non-GAAP tax rate includes adjustments to our tax valuation allowance on deferred tax assets and excludes the interim tax cost of the one-time transfer of intellectual property rights between our legal entities.

(8) We incurred expenses, including revaluation of the contingent consideration, in connection with our acquisitions, which would not have otherwise occurred in the period presented as part of our other income (expense); therefore, these costs are excluded from our non-GAAP operating expenses.