CIBC Take on SVCThis was published On Dec 12. Still seems valid today.
Regards
"What's Changed
Sandvine announced that it expects revenue for fiscal Q4 to be approximately $27 million. This warning about Q4 compares to our revenue estimate of $30 million and consensus of $35 million. Specifically it was stated that major network equipment vendors are being impacted by slowing product revenues from communications service providers, most pronounced in the cable market. The value of orders for cable carriers in the U.S. declined by approximately 60% during the year.
On a conference call, it was stated that Sandvine still expects 2017 revenue growth. The issue is how much and will these deferrals continue. Our view is growth will be modest. Carriers are being faced with technology shifting towards software defined networking, encryption and virtualization. Collectively these appear to be impacting demand for Sandvine software and hardware.
Implications
Our investment thesis is unchanged and assumes modest growth and limited operating leverage. Our 2017 revenue estimate is lowered from $131 million to $127 million (5% revenue growth) and adjusted EPS from $0.13 to $0.12. Lower growth is leading to limited operating leverage, primarily due to rising operating expenses. We would need to see consistent execution in operating leverage before upgrading the stock. Our 2017 adjusted net margin estimate remains at 14% and is towards the low end of the company's target business model of 10% to 20%.
Valuation
Our Neutral rating and $3 price target are unchanged. Our target is based on 10x our 2017E EPS of $0.12 (from $0.13) plus net cash per share of about US$1. We apply a USD/CAD rate of 1.3. SVC is trading at 9x 2017 EPS versus peers trading at 20x. On a pure 2017 P/E basis, SVC trades at 17x versus peers at 14x