Starent (STAR-OLD) was down 1.80, -6.9%, Friday after reporting higher revenues and beating guidance and estimates, and raising guidance for the year. The market is focusing on international sales, AT&T (T) and Tier 1 4G orders.
STAR has an advantage in multimedia core networks market for several reasons, including scalability, signalling and intelligent cores. Scalability allows carriers to increase traffic by adding linecards and software, eliminating forklift upgrades and lowering long-term costs. Signalling is where the market is headed; routers have throughput but no processing, and if carriers want to process a phone call, video and Twitter at the same time, then carriers need signalling instead of routers. Intelligent cores allow packet inspection, among other things, which allows the carriers more revenue paths (I am guessing through targeted advertising).
Presently, if carriers want to expand traffic, they usually need to add entire new base stations. The main advantage for STAR, according to the CEO, is that STAR allows carriers to process multimedia with less equipment up front and less equipment to expand. STAR's products are the most expensive, but the CEO says the resulting simpler network will deliver more bits per dollar, up front and in the future.
STAR's international sales are slim. Last quarter they sold material amount of equipment to one Japanese/Korean customer, probably KDDI, that was ~15% of sales, and that is about it. STAR is running trials with all of the Chinese carriers, but has contracts with none and expects no sales during 2009. India is still absorbing its recent auctions and nothing is happening yet.
AT&T has signed no contracts with STAR, and AT&T has switched to a domain system which will make it more difficult for STAR to get AT&T contracts; the Motorola partnership also will result in no revenue for STAR until 2010.
Finally, Tier 1 carriers are not ordering 4G/LTE equipment yet. AT&T has seen its wireless data revenues double over the last two quarters. My own speculation is that the carriers are waiting to figure out how much traffic they will need to provide; why invest in extremely expensive capital, then replace it within a couple of years? With the combination of intense innovation and IP traffic growth, I do not blame them for waiting until the last possible moment.
STAR will not keep up its gaudy growth numbers without international sales, and it may take another year before its earnings growth justify its PEx; however, I see two important facts: AT&T and the Chinese are not spending capital on LTE yet, and STAR is growing 25% while the rest of the industry has experienced 10 to 40% revenue declines.
This tells me that while STAR's near-term growth may be relatively slow, they are offering a superior product and gaining market share; STAR is an expensive, premium product, so I am not surprised that it is not getting contracts from small carriers.
Thus, I continue to believe that the company will grow rapidly, especially as LTE capital spending materializes, inevitably, as wireless broadband traffic grows.
If T and the Chinese start signing contracts without STAR, then I will be a seller.
Disclosure: Long STAR and T