RBC UpgradeBump both their rating and price target. Their upside scenario target is $5.40. GLTA
July 11, 2014
Sandvine Corporation
Upgrading to Outperform on solid execution and
improving outlook
Our view: Over the last several quarters, we have seen consistent progress
in order flow, revenue growth, and profitability—items that were elusive
in prior years. Looking ahead, we see continued strength in end-market
demand, solid product positioning, and attractive valuation at 15.1x
C2015E P/E (10.6x ex-cash). We upgrade SVC shares to Outperform (from
Sector Perform) and raise our target price to $4.60 (from $4.00).
Key points:
• Upgrading to Outperform on consistent operating performance and
sustained profitability; price target to $4.60 from $4.00: Over the past
~2 years we have seen much more consistent order flow and revenue
growth from Sandvine. This growth has been well-diversified and has
leveraged the existing customer base to a greater degree than in prior
years. Further, profitability has returned on a sustained basis—now for
seven consecutive quarters.
• Looking ahead, we believe Sandvine is well positioned to benefit
from growing end-market demand for service creation and business
intelligence products, two areas where Sandvine has differentiated
itself. Further, we believe NFV could drive the next leg of growth with
more visible and recurring streams of revenues and earnings.
• SVC shares have performed well over the past year yet still trade at
attractive levels, in our view, relative to peers and expected earnings
growth levels. SVC trades at 2.2x C2015E EV/Sales and 15.1x C2015E P/E
(10.6x ex net cash), slightly below its peer group at 2.2x and 16.3x (12.4x
ex net cash), respectively.
• Taking share with value-added services: We believe Sandvine is taking
market share from its pure-play competitors. Allot’s 2013 revenues
declined -8% y/y, with stronger Q1 performance moderating LTM
declines to -4% y/y. Procera reported +25% y/y revenue growth to
$75MM in 2013 (22% y/y on LTM Q1). However, this includes ~$5MM of
revenues from acquiring Vineyard (organic growth was closer to +17%).
• Stronger balance sheet and healthy FCFs support potential, targeted
M&A: Sandvine ended FQ2/14 with $145MM (C$1.00/share) in net
cash, up from $121MM last quarter. This was bolstered by a $20MM
change in net working capital. At these levels, we believe Sandvine holds
an enviable "war chest" to pursue opportunistic tuck-in acquisitions to
accelerate growth.
• Solid FQ2/14 results: Sandvine reported FQ2 revenue of $29.7MM
(+26% y/y) and adjusted EPS of $0.03. These are in line with our
and consensus expectations of $30.3MM and $0.03, respectively.
Notably, Sandvine delivered 26% y/y revenue growth without reliance
on large contract wins. Revenue was well diversified, with two major
contracts (including reseller Alcatel Lucent) accounting for only 28.6%
of revenues. Further, existing customers generated ~90% of revenues in
the quarter.