M Partners analyst Ron Shuttleworth: Sandvine Appears to be Plateauing

The management team of Waterloo's Sandvine. Fiscal 2011 was a step backward for the company, which had been steadily improving for a number of years.

On Thursday, Sandvine (TSX:SVC) announced its fiscal 2011 results. Revenue came in at (US) $89.3 million compared to $92.08 in fiscal 2010, and the Waterloo-based company lost $5.8-million, a number nearly equal to the amount it made in 2010.

M Partners analyst Ron Shuttleworth says the numbers reveal exactly what is happening at Sandvine; the company is plateauing. In a research note this morning, Shuttleworth says he does not expect the kind of growth that took the company from just over $50 million in 2008 to continue, and that Sandvine may end up “scrambling for market share in its core business.”

While Shuttleworth applauds the company for its innovative service creation business, which enables users different ways to pay for bandwidth, he believes competitors may quickly co-opt the strategy. Nonetheless, Shuttleworth forecasts a marginal rebound on Sandvine in 2012. The M Partners analyst believes Sandvine revenue will grow by 10% this year, but that a recovery is contingent on factors that could go sideways, such as the deployment of upgrades at clients Telefonica and NTT.

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Sandvine sells technology that gives service providers a window into the world of their chaotic traffic. The buzz-phrase in this space is “deep packet inspection”, a technology that enables wireline and wireless networks to target data-overload issues. US market research firm Infonetics Research forecasts the standalone service provider deep packet inspection market will more than triple from 2011 to 2015, when it believes global sales will top $1.6 billion.

Shuttleworth reiterated his HOLD recommendation on Sandvine, with a $1.40 share price target. This, he says, “implies a 12.7x EV/EBITDA multiple, which is a 17% discount to the peer set median of 15.3x.”

In March of last year, Sandvine’s streak of six consecutive quarters of increased revenue came to an abrupt halt, when its Q1 came in below expectations. The second and third quarter of 2011 were better, but on December 6th, 2011 management warned its Q4 would fall between $19.5 to $20 million. The company came in slightly above that range, at $20.6 million, but lost three cents a share.

Shares of Sandvine, which began 2011 at $2.81, closed today at $1.25.

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