And So Does RBCThinking the same way as TD. Their upside scenario target is $5.80. GLTA April 9, 2015
Sandvine Corporation
FQ1/15 results – Another solid quarter; valuation
remains attractive
Our view: Sandvine delivered solid FQ1/15 results, with earnings ahead of
our and consensus expectations. On revised earnings we continue to see
attractive valuation (~15x C2016E P/E, or only ~10x ex cash), and maintain
our Outperform rating. Target to $5.00 (from $4.60), largely on translation
from US$ earnings to C$ share price and rolling estimates ahead by a
quarter.
Key points:
• Solid FQ1/15 results: Sandvine reported FQ1 revenues of $32.4MM, in
line with our and consensus expectations of $32.9MM and $32.5MM
respectively. EMEA and APAC regions revenues grew +33% y/y and +54%
y/y, offset by declines in NA and CALA which declined -4% y/y and -54%
y/y, respectively. Adjusted EPS was $0.05, ahead of our $0.03 forecast
and consensus of $0.04.
• F2015E remains a year of investments: Despite better than expected
profitability in FQ1, Sandvine management reiterated expectations of
increased S&M expenditures in F2015E, which is expected to temper
after tax operating margins y/y. We believe the investments in the
business should help entrench Sandvine as the network standard
for many tier-1 operators. Supportive of this view, is the ongoing
transition of Sandvine as a direct supplier to Telefonica from fulfilment
partner Alcatel. CEO Dave Caputo indicated the transition was “…going
significantly smoother than the previous transition [from Huawei]”
which resulted in material revenue/contract deferrals three years ago.
• Multiple avenues of growth despite net neutrality in US: On the call,
management commented that discussions regarding their virtualized
offerings roadmap often coincide with sales discussions for their
more traditional offerings. There are three customers currently in
‘production’, a number management feels “increasingly confident” of
growing. We believe that business services (virtualized offerings of
Sandvine’s product suite to SMB/corporate enterprises via network
operators) remain another compelling growth avenue over the longer
term. In addition, management believes that they are in the early
innings of a multi-year upgrade cycle to 100gig, which could drive
material revenue growth ($100MM+ revenue range).
• Healthy balance sheet and strong FCFs supportive of M&A; organic
investments: Sandvine ended FQ1/15 with net cash held at $153MM
(~ C$1.25/share) as FCF generation of $5.1MM more than offset share
repurchases in the quarter. LTM FCF held at ~$41M. At these levels,
we believe Sandvine could concurrently pursue opportunistic tuck-in
acquisitions to accelerate growth, and repurchase shares to boost EPS.
Quarter to date, Sandvine repurchased ~600k shares.
• Risk/reward remains attractive – Maintain Outperform, target to
$5.00 (from $4.60): SVC shares trade at attractive levels, in our view,
relative to peers. SVC trades at 1.8x C2016E EV/Sales and 10.4x C2016E
P/E ex. cash, below their peer group at 2.2x and 11.9x, respectively