How Will 2013 Bode for These 3 Tech Companies?
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Editor's Note: This article has been amended to better describe Riverbed's Steelhead device.
With Forrester anticipating a smoother ride ahead for the US tech industry, it will be interesting to see how CIOs invest their IT budgets. According to the report, business and government spending on “Information & Communication Technology” products and services is expected to rise by 5.7% in 2013. Earlier in January, Forrester indicated a growth of 7.5%, which has now been slashed due to lower-than-expected government spending. The tech companies are not getting orders from the government, which typically highly contributes to the sales of these products, due to mandatory spending cuts in the federal budget.
In this article, I have analyzed three companies from the networking industry. Let’s see how they are trying to survive in the current scenario.
Company showing slow growth
Riverbed Technology (NASDAQ: RVBD) acquired Opnet Technologies, a supplier of software products for network management solutions, in December 2012 for $1 billion. Opnet contributed $52 million to the total revenue of $252 million reported by Riverbed for the first quarter of 2013. The company is expecting total revenue of $260 million for the second quarter of 2013, of which Opnet is expected to contribute $46 million. The anticipation of lower revenue from Opnet is due to the spending cut of the federal government. Reported federal spending was $31 million in the first quarter, down 3% year-over-year. Further revenue decline is expected on the basis of the slowdown in European economies such as the UK, France and Belgium, where the company operates.
The reason for the decline was Steelhead, a device used for the acceleration of data transfer on WANs, having only a 15% to 20% market penetration. The lower penetration is due to customers using WAN optimization at only some branch locations. The company is assuring growth in the future by emphasizing the use of Granite, a device used to eliminate servers across the WAN without compromising performance. According to the company, Granite will drive customers to use Riverbed at more branch locations, which will help ensure the company's forecast of 40% to 50% market penetration.
Riverbed's Wide Area Network (WAN) optimization business segment -- which contributes 85% of its total revenue -- declined by 13% year over year to $171 million in the first quarter of 2013.
With the forecast of high penetration, Riverbed is expecting $216 million revenue in the second quarter of 2013.
New technology making a difference
Palo Alto Networks (NYSE: PANW) launched its Next Generation firewall, a multi-functional security device that is equipped with application control, in 2012. With the constant increase in the number of cyber threats, this firewall allows customers to access third-party applications without the risk of getting infected by malware, and does not compromise performance. Palo Alto's technological breakthrough is new to the $5 billion firewall market; very few of its competitors in the market offer this type of firewall, and this is one of the reasons why the company has added 1,000 customers every quarter since the first quarter of 2012. Focusing on this product, the company is expecting total revenue of $104 million in the fourth quarter of 2013.
Palo Alto's Wildfire, a malware protection software product launched in November 2011, is gaining traction in the market and currently has more than 1,300 customers. The software scans more than 500,000 files per month. Recently, the company launched its paid version of the Wildfire software for which customers have to pay an annual subscription fee of $15,000. It is expected that Palo Alto will gain $19.8 million every year from these 1,300 customers' subscription fees. With the lower number of players in this segment, the company also expects to attain a majority of the market share.
Company facing tough competition
Aruba Networks (NASDAQ: ARUN) is working in partnership with Microsoft (NASDAQ: MSFT) on Microsoft's Lync, an online communication software product. This product is designed mainly for corporate environments and will provide them with high-quality audio and video during voice and video conferencing over a Wi-Fi network. Aruba is currently the only "Microsoft network infrastructure optimization partner," ensuring that Microsoft Lync is given the highest priority on the company's Wi-Fi network. Corporate customers now often prefer working on mobile devices such as laptops and tablets that connect to a Wi-Fi network instead of using traditional wired network connections. With the increasing use of mobile devices in corporate businesses, Aruba is taking initiatives to troubleshoot and optimize its Wi-FI network through application integrated platforms (APIs).
Aruba will benefit only in the short term from being the only optimization partner, however, as Microsoft is planning to extend its partnership to other companies in the future. Aruba is expecting total revenue of $150 million in the fourth quarter of 2013, which is a bare-minimum change from its last quarter earnings of $147 million.
Recently, the company announced an acquisition of Meridian Applications, a software company that provides Wi-Fi and navigation services at public places like hospitals, museums, shopping malls, railway platforms, colleges, and convention centers. Aruba will use Meridian's Wi-Fi software platform to provide these services, making it easy for mobile device users to use the Internet and navigate within large indoor areas. This service will give store owners in the mall an opportunity to introduce applications for smartphones that will help customers to locate their stores. With this acquisition, the company is expecting a rise in its revenue which is currently almost flat.
Riverbed's Acquisition of Opnet will take some more quarterly results to show profitability, and with the plan of increasing market penetration with WAN optimization business it is expected to show profitability in the long term.
Palo Alto's new technology in the firewall segment and the paid version of the Wildfire product gives the company a good opportunity to book profit for the next quarter. I recommend a buy on this stock.
Aruba currently being the sole optimization partner for Microsoft and the acquisition of Meridian will help the company to build a strong presence in the market. The company is taking initiative to become a market leader.
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Madhu Dube has no position in any stocks mentioned. The Motley Fool recommends Riverbed Technology. The Motley Fool owns shares of Microsoft and Riverbed Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!