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Riverbed's Gear Zooms Data Across Oceans At Almost Light Speed
March 2, 2007 -- Judging by the rapid growth of Riverbed Technology's clientele, most companies prefer to work at the speed of light. That's how fast a PowerPoint file or other electronic document should travel from one computer to another.
But network gear slows the trip by chopping documents into as many as
1,000 electronic packets and individually shooting them to a recipient's
desktop, where they are reassembled into a file. On a typical landline,
each packet could take a quarter-second or more to reach London from New
York, for example. Multiply that by 1,000 and the resulting delay can
hamper productivity.
Riverbed (NasdaqGM:RVBD - News) came into existence to solve
this problem. Its Steelhead boxes reduces the number of data packets
from 1,000 to as few as 10. This helps files race across wide area
networks, or WANs. Speed also reduces the amount of hardware, like
servers and data storage units, that companies must house in branch
offices. If files travel quickly across a WAN, then companies can store
data in fewer locations, cutting down the cost of equipment, maintenance
and technical support.
Demand Surge
Demand is surging as companies everywhere seek to pare IT costs while
stretching their work forces and client bases across states, countries
and continents. With its specialization in so-called WAN optimization,
Riverbed has become a key player in this growing niche of networking
technology. Fourth quarter sales grew 37% versus 20% for its chief
rival, Packeteer (NasdaqGS:PKTR - News).
"The people that use our product want employees in globally distributed
offices to collaborate," said chief executive Jerry Kennelly. "We make
sure that distance doesn't rob them of acceptable performance."
Investors are buying into Riverbed's story. The company's shares priced
at 9.75 in its September IPO, above the expected range of 7 to 8. Shares
rose over 50% the first day.
Co-founders Kennelly and Steve McCanne met in 1998 when Inktomi, where
Kennelly was an executive vice president, acquired McCanne's Internet
video startup. Kennelly has spent 30 years in operations and business
development for tech companies. He taught computer science at the
University of California, Berkeley, where he received his doctorate.
They agreed to start Riverbed while drinking coffee at a Starbucks in
Berkeley one Saturday morning in 2002.
"We're a classic business team," said Kennelly.
Globally, just 7% to 10% of WANs have optimization hardware like
Riverbed's, according to Wall Street analysts. Research firm Gartner
expects total sales of this hardware to grow 33% this year, reaching
nearly $1 billion.
"It's still a very under-penetrated market," said Troy Jensen, an
analyst with Piper Jaffray.
The need for speedy data transmission cuts across various industries.
Small service businesses like architecture and engineering firms
exchange data-heavy files of diagrams or calculations between offices.
Oil and gas firms rely on ultra-slow satellite connections to receive
seismic data from offshore drilling rigs. Investment firms and insurers
are scattering offices across the globe looking for new clients among
the world's emerging affluent.
What's more, the outsourcing trend has boosted the need for WAN
optimization technology so that engineers, for example, can send
diagrams to manufactures in other countries within minutes, rather than
hours or days.
Big Market
Some analysts say the market may ultimately exceed $20 billion.
"This is still a very nascent opportunity," said Kennelly. "We expect to
be meeting existing demand for the next 5-10 years.
Riverbed is holding its ground amid growing competition. Cisco Systems
(NasdaqGS:CSCO - News),
Juniper Networks (NasdaqGS:JNPR - News),
F5 Networks (NasdaqGS:FFIV - News) and Packeteer have entered the
market with acquisitions. On a recent conference call, Kennelly said
that in the fourth quarter, Riverbed and Cisco competed for 105 deals.
By his count, Riverbed took 98 of them. According to Gartner, Riverbed
steadily gained market share during 2006. Today, it holds roughly 14%,
second only to Packeteer with 18%.
But it's uncertain how long this will last. Riverbed's larger
competitors can bundle WAN optimization technology with their core
networking hardware like routers and switches, just as they do with data
storage and network security.
"The question is whether Riverbed will stay dominant enough with its
current product to fend off Cisco, F5 and Citrix (NasdaqGS:CTXS - News) until its next product is
ready," said Gartner analyst Joe Skorupa. "No company in history has
been able to survive as a one-product company. Riverbed is no exception
and I think they know that."
During the company's last conference call, chief executive Kennelly said
Riverbed is developing a product for personal computers. This would give
traveling employees faster access to data on corporate servers whether
they are logging on from an airport lounge or hotel room. This type of
application would be highly profitable since software margins reach as
high as 95%. Riverbed expects to launch its product this summer.
"It's the most requested (technology) product on the face of the earth,"
said Kennelly at a recent Goldman Sachs conference. "It uses our base
technology. And it puts extra (pressure) on corporations to hasten
deployment of our Steelhead boxes."
Copyright 2007 Investor's Business Daily, Inc.
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