Analyst Tom Astle says Sandvine may be a Takeover Candidate

Yesterday, Sandvine (TSX:SVC) reported its Q1, 2012 results. Revenue came in at $20.1-million, which was a slight increase over the $19.1 the company reported in the same period last year. The company’s balance sheet took a bit of a hit, though, as the Waterloo tech reported a $6.5-million loss, which included a $3.7-million inventory writedown related to one of the company’s older hardware platforms.

Byron Capital’s Tom Astle says the results are underwhelming and make him nervous about Q2. Astle expects Sandvine to grow this year, but believes most of that growth is weighted to the second half of 2012, when large customers like Telefonica are expected to start spending again. In a research update to clients Friday, Astle reiterated his Hold Rating and $1.50 target on Sandvine.

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Sandvine, which was formed in 2001, sells technology that gives service providers a window into the world of their chaotic traffic. The company’s deep packet inspection technology equips network operators with the critical information they need to make decisions and form policies on service plans, capital investments and premium services. Sandvine now has more than 200 clients in 85 countries, including Cricket, Telefonica and Comcast. These wins helped its topline grow from $51-million in 2008 to $92.7-million in 2010. 2011, however, was a step backward, as revenue came in at just $89.3-million.

Astle says Sandvine’s revenue is declining because the company is losing market share to competitors such as Allot and Procera, a curious development considering it spends twice as much on research and development than those companies. He wonders if this is part of the “stages of deployment of Sandvine’s customer base” or something more nefarious, such as outdated products or less than effective sales and marketing. But the Byron analyst does see a potential silver lining in Sandvine’s recent missteps. The company’s relatively discounted valuation, he says, might make make it an attractive takeover target in an industry that is consolidating.

Shares of Sandvine closed Friday even at $1.56.

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