RBCTheir upside scenario target is $5.70. GLTA
April 5, 2015
Sandvine Corporation
Expect solid FQ1/15E; watch commentary on
growth outlook and net neutrality
Our view: We anticipate another solid quarter of growth and profitability
from Sandvine, supported by $5–10MM in prior large contracts received
in Q4. At 14x C2016E P/E (or only 9.5x ex cash), we see an attractive risk/
reward profile. Maintaining Outperform rating and $4.60 price target.
Key points:
Expect solid FQ1/15E results: We forecast revenues of $33MM (+4% y/
y), in line with consensus expectations of $32.5MM. This should generate
Adjusted EPS of $0.03, a penny below consensus of $0.04. We believe
$5–10MM of large contracts received in Q4 should drive much of the y/
y growth.
Look for large contract momentum to pick up: FQ1 tends to be a
seasonally softer quarter for large contract order flow. F2014 marked a
high point with $42MM+ (+33% y/y) in large contracts secured. This, in
turn, contributed to +20% y/y revenue growth for the business. We look
for an update to large deal flow pipeline on the conference call.
Look for discussion on implications of US net neutrality rules, but expect
underlying demand is largely unchanged; several content providers
seeking fast lanes: We believe the net neutrality debate is likely far
from over, even after the reclassification of broadband as a regulated
common carrier earlier this year (Title 2 of the Communications Act of
1934). Several broadband companies (industry trade group US Telecom,
Alamo Broadband) have subsequently sued the US regulator, highlighting
the "arbitrary and capricious" nature of those rules as well as the
"abuse of discretion". Several content providers are also looking at
"sidestepping" these issues by seeking to re-categorize their offerings as
managed services. We expect that the debate adds to the sales cycle for
Sandvine, and we believe that underlying demand growth remains largely
unchanged.
Strong cash position offers flexibility: Sandvine ended F2014 with
$151MM in net cash (~C$1.25/share, or approximately one-third of the
market cap). We view this as sufficient to pursue tuck-in acquisitions,
sustain organic growth initiatives/R&D, and buy back shares under the
recent NCIB. Quarter to date, Sandvine repurchased 348k shares for
~C$1MM.
Risk/reward remains attractive; maintaining Outperform and $4.60 price
target: SVC shares trade 1.6x EV/Sale, or only 9.5x P/E (net of cash) on our
C2016E estimates. We view this as attractive relative to earnings growth
prospects, and it is below a group of network equipment companies which
trade at 2.2x EV/Sales and 11.6x P/E (net of cash) on C2016E consensus
estimates