RBC ForecastTheir upside scenario target is $4.75. GLTA
July 8, 2014
Sandvine Corporation
FQ2/14E preview – Expect continued growth
Our view: We expect another quarter of revenue growth and profitability
on the back of improving end-market demand and contract flow in
recent quarters. At 2.4x EV/Sales and ~15x C2015E P/E, SVC shares trade
roughly inline with peers and at levels that reflect a good measure of this
improving dynamic.
Key points:
Expect y/y revenue growth in FQ2/14E: Sandvine reports FQ2/14E results
before markets open on July 10, 2014. We forecast revenues of $30.3MM
(+29% y/y), inline with consensus. On consolidated gross margins of
73.0%, we anticipate $0.03 in EPS also inline.
Large contract momentum slows in FQ2/14E, though LTM shows
material improvement: In FQ2/14E, Sandvine announced only one multimillion
follow-on contract, compared to $15MM+ signed last quarter.
Large contracts by their very nature are lumpy, but we note the $33MM
+ of large contracts signed over the LTM represents a +16% y/y increase
over the prior period.
EMEA expected to be ‘best’ market for 2014 telecom capex growth:
According to Infonetics, overall global capex spending by telecom
operators is expected to grow 4% y/y, with EMEA taking the lead
despite revenue declines by operators. Europe’s ‘Big 5’, Deutsche Telekom,
Orange, Telecom Italia, Telefónica, and Vodafone are each investing in
their networks. Sandvine generates 1/3 of their revenues in EMEA,
with LTM revenues growing 73% y/y in the region. In their March
quarter results, Allot Communications delivered +6% y/y and +85% q/q
EMEA revenue growth, and management commented bookings from the
territory were very encouraging.
Lofty 4G targets at China Mobile also supportive of sector demand: China
Mobile’s 4G TD-LTE build-out is expected to accelerate in the 2H/14E. In an
interview with ChinaDaily, China Mobile’s President and CEO commented
the company aims to sell 100MM 4G devices by year end, which is
multiples above the 12MM 4G devices currently subscribed. China Unicom
and China Telecom are also rolling out their 4G networks.
Strong balance sheet provides growth options: Sandvine ended Q1 with
$121MM in net cash on hand ($0.79/share). We view this as sufficient to
pursue tuck-in acquisitions and sustain organic growth initiatives/R&D.
See balanced risk/reward; Maintain Sector Perform and $4 target price:
SVC shares trade 2.4x EV/Sales and 11.5x P/E (net of cash) on our C2015E
estimates. This is roughly inline with network equipment companies which
trade at 2.2x EV/Sales and 12.7x P/E (net of cash) on C2015E consensus
estimates.