CIBC Research Worried About Sandvine

Given their Roman Candle-like existence, we’ve taken a particular interest in the activities at Sandvine (SNVNF.PK). With shrinking guidance (see prior post “Sandvine gets taken out and shot” March 7-08), shareholders can only hope that the beating will stop soon. Somebody bought over 1 million shares the other day, so perhaps that’s a sign of something positive (except that someone had to sell as well).

Here is the CIBC Research preview for this week’s excitement. CIBC World Markets was a key underwriter on the recent equity offerings (now all underwater), so the hopefulness isn’t just a passing fancy:

Q1 Is Set But Will SVC Provide An Outlook For Q2 That Supports Its 2008 Goals?

Sandvine is set to report Q1/08 results on Wed., April 9th before the market opens. A conference call has been scheduled for 8:30AM. We expect SVC to report in line with its profit warning and provide an outlook suggesting a return to growth throughout 2008.

We expect Q1/08 rev. of $8.2M, down 62% q/q and 59% y/y. SVC is struggling as a weaker economic outlook in the US has reduced its carrier’s (Comcast) capital spending. We expect EPS to be -$0.04, however our est. could be high as operating costs will not adjust to the weaker top line.

For Q2/08, we expect revenue of $12.3M, up 49% q/q as some revenue from Comcast continues, as well as deployments from existing customers. For F2008 we expect revenue to be $70M, down 5% y/y, and EPS to be $0.00. This estimate assumes a significant ramp in the 2H/08.

We reiterate our SO rating and PT of $2.50. SVC trades at 1.9x its 08 forecast plus its cash/share of $0.83. In the near term SVC must fill in the balance of its outlook. Longer term, the shares are undervalued given the DPI opportunity in all the access technologies.

Comments

[jimsum]

I think CIBC has the wrong idea about how Sandvine earns revenue. Most of Sandvine's revenue comes from new customers, not existing ones. Sandvine did so well the last few years because they landed a few huge customers that needed to buy hundreds of boxes from Sandvine; after the initial big purchases, the ongoing service revenue is not very significant (yet).

Sandvine management keeps telling everyone that revenue will be lumpy. Big new contracts don't necessarily line up so that new orders for hundreds of boxes immediately appear when the previous big order is filled. Sometimes quarters will go by without any new huge orders, sometimes there will be multiple huge orders at the same time.

Eventually, if the competition doesn't beat them, Sandvine will have enough customers that service and upgrade revenue will outweigh revenue from new sales. Then investors should expect that quarterly revenue will be stable and predicatable; until then, we should expect high volatility as Sandvine gains new customers. Forget about how this quarter compares to previous Sandvine results; the important question is how Sandvine's latest quarter compares to the competition.