Sandvine is stuck in first gear, says Byron analyst Astle

Stuck in first gear. Byron Capital analyst Tom Astle says until he sees evidence of growth or a change in operating style at Sandvine he will continue to regard the company as a trading name. Sandvine (TSX:SVC) this morning reported its Q3, 2012 results. The Waterloo-based company lost $900,000 on revenue of $21.8-million. The numbers were an improvement over Q2’s $18.6-million topline, but not enough to prevent its fourth consecutive quarter in the red.

Sandvine CEO Dave Caputo says despite the losses, the company is making headway: “While we acknowledge that more work is needed to better leverage our market opportunity, we believe that our third quarter results are an indication of progress,” he said, adding: “We received some very significant follow-on orders from Tier 1 customers, which has been our main area of focus in 2012 and will be an important aspect of returning to strong growth.”

Byron Capital analyst Tom Astle says Sandvine is stuck in first gear. While the quarter saw some positives, such as the fixing of its distribution agreement with Alcatel Lucent and a $5-million order from a tier one Asian operator, he says the company’s cost base remains fixed and thus the bottom line is reliant upon growth that we aren’t seeing. The Byron analyst says until he sees evidence of growth or a change in operating style he will continue to regard the company as a trading name. In a research update to clients this morning, Astle maintained his HOLD rating and $1.50 target price on Sandvine.

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Sandvine was founded in 2001 by a group that had just sold PixStream to Cisco for $554-million. After Pixstream became the 117th acquisition Cisco did in 2000, it curiously shut the division down just four months later. Sandvine, however, grew because web traffic exploded. As networks became increasingly burdened in the latter half of the last decade, the company’s technology gave service providers a window into the world of their chaotic traffic. The company’s deep packet inspection technology equipped 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 that if Sandvine can regain a competitive stance, there is growth to be had. He notes that most industry analysts say the deep packet inspection space is growing at approximately 25%. And he points out that its relatively brief time as a laggard has punished Sandvine’s valuation; the stock now sits at one times EV/Sales. Companies at the top of its peer group, such as Allot and Procera, trade at four to five times EV/Sales.

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