RBCAs I suspected, retail investors are overreacting. RBC have only reduced their target to $4.30 and their upside scenario target is reduced to $5.00. As the saying goes, buy when there's blood in the (Sandvine) streets. GLTA
September 9, 2015
Sandvine Corporation
Disappointing preliminary FQ3/15E revenue;
Longer-term outlook unchanged
Our view: Sandvine preannounced FQ3/15E revenues below
expectations, driven again by large order deferrals. Quarterly lumpiness
is a reality with Sandvine’s business model, and we believe we are seeing
that here (though it is disconcerting to see 2 quarters in a row). At 8x
C2016E P/E (ex cash), we believe risk/reward remains attractive. Maintain
Outperform rating, target to C$4.30 (from C$4.80).
Key points:
Preannounced FQ3/15E revenue below expectations: Sandvine
announced FQ3/15E (ending August) revenue expectations of $27MM,
below our and consensus prior forecasts of ~$33MM. In the press release,
management commented on continued reliance “on large deals to fuel
growth, but many of those deals are taking longer than expected to close.”
See no change in competitive positioning; though tempering forecast on
order deferrals: In our view, Sandvine remains well-positioned to benefit
from aggressive growth of broadband demand driven in large part by the
proliferation of video, social media and mobile. Sandvine’s solutions allow
operators to intelligently monitor and manage network traffic and drive
new revenue opportunities.
While it is obviously not optimal, we see the periodic lumpiness as ‘part
of the business’ for Sandvine - large deals drove $42MM of revenues in
F2014 (34%) vs $8MM booked in F2015E to date. By their very nature,
these large deals can extend beyond fiscal quarter ends, particularly
when the customers are large service providers who work to their own
schedule. We do not believe this preannouncement implies any change
in their competitive positioning, overall industry demand or execution
capabilities. However, we do acknowledge the near-term impact to
revenues and profitability resulting from these deferrals as reflected in our
revised estimates (see adjacent table).
Large cash position and FCF generation provides operational and M&A
flexibility: Sandvine ended FQ2/15 with $163MM in net cash (C$1.35/
share, or ~1/2 of the market cap). We view this as sufficient to pursue tuckin
acquisitions such as MoMac BV and sustain organic growth initiatives/
R&D.
Risk/reward remains attractive - Maintain Outperform rating; Target to
C$4.30 (from C$4.80): With the share price pull back, SVC shares now
trade at less than 2x cash or 1.0x EV/Sales and 7.6x P/E (ex cash) on our
C2016E estimates. We view this as attractive relative to their long term
earnings growth prospects, and relative to group of network equipment
companies which trade at 2.1x EV/Sales and 11.7x P/E (net of cash).