Starent Networks: Ready to Shine

| About: Starent Networks (STAR-OLD)

As more and more consumers are using cell phones for features other than just talking, networks are working hard to keep up with technology necessary to process the flow of data. Providers have begun moving from a switch type system that gives each user a dedicated line, to a packet system that uses a different protocol to divide up and re-transmit information with multiple users on the same connection. While this type of technology is Greek to most of us, Starent Networks (STAR-OLD) thrives on its ability to offer applicable services to wireless providers.

While the company just came public in June, the management is experienced in the area with most having served time with many of the top tier wireless firms. This is important because the company calls on these firms and has a high concentration in revenues from firms such as Verizon (NYSE:VZ) (30% of revenue), Sprint (NYSE:S) (20%) and Nortel (NT) (20%). While the high customer concentration poses a risk if one of the firms were to discontinue their relationship with STAR, it also validates the importance of STAR’s products if such firms are willing to give it these large contracts.

Starent holds an estimated 80-90% market share servicing firms using the CDMA technology. As clients are upgrading to the more advanced UMTS platforms, STAR is using its existing relationships to begin selling its new products that interface with the new technology. While it is still early in the game, Starent just announced a UMTS deal with a large client that most analysts believe is Vodafone. This new contract should help solidify STAR’s presence in the UMTS space and allow it to more aggressively pursue new contracts in this area.

Wireless data growth is by no means confined to the United States, and the company is active in international markets cementing contracts with many large firms across the globe. Industry checks show the growth internationally is about equal to that of the United States, with the Asia Pacific markets being the largest for mobile data. It will be important to watch how many contracts the company is able to sign in multiple locations in order to leverage their business.

Speaking of leverage, I was impressed in looking at the balance sheet and noting that after the IPO, the company has no debt to speak of and a significant amount of cash. This allows them to continue developing products, aggressively pursuing new clients, and management can concentrate on their overall business plan instead of courting the capital markets for additional funds. I am impressed with the name and while it is expensive, I think the growth prospects will pan out to be extremely beneficial to the company and to investors. Visibility is good as bookings have been strong for this year (translating to stable revenue for next year), and estimates are likely conservative as analysts are still becoming more familiar with the business model.

For a perspective on a wireless provider see my article on Metro PCS (PCS).

STAR 2-mo chart


Disclosure: Author does not have a position in STAR