Sandvine Flatlines: What Happened?

What a week for technology equity research analysts — and the investors who take their advice. Two of the better-known recent initial public offerings have flamed out within a day of each other, and this pain will cascade across the entire Canadian tech financing industry.

Sandvine (SNVNF.PK) management gave in to reality and pulled its C$80-C$85MM revenue guidance this week once it became apparent that the aforementioned “guidance” was about as useful as [fill in your own cliche here]. Redline’s [RDL/TSX] sales are soft due to sales management turmoil and that classic reason: customer spending delays; the revenue miss wasn’t massive, but the outlook didn’t inspire any confidence given the apparent need to raise more capital in a difficult equity market.

It’s not that the trend had been friendly to shares of either company. Each has provided investors with more than a couple of opportunities to rush for the exits over the past two or three quarters.

The challenges weren’t exactly a well-kept secret. Last November, for example, the Thomas Weisel Software & Services equity research analyst opined that street expectations for Sandvine were over-the-top (see prior post “Westwind anticipates near-term earnings disappointment at Sandvine” November 21-07). However, he still didn’t see just how dark the revenue tunnel was, and rated the stock a “buy” at the time.

For our part, we’ve portrayed Sandvine and Redline as two classic examples of expectations mismanagement in a variety of posts (see prior posts “Redline Communications a classic tale” March 3-08, “Tech haves and have nots” March 8-08, and “CIBC Research fretting about Sandvine” April 7-08). I’m no stock analyst, but I sure didn’t buy the revised Sandvine 2008 revenue guidance when its management in March updated it - revenue for Q3 and Q4 was to be more than double that of Q2. It was finally retracted this week (“Sandvine gets taken out and shot” March 7-08).

In hindsight, investors will wonder about the veracity of that rosy revenue guidance given that management was offloading some their own shares along the way. The insider sales at Redline were modest when compared to Sandvine, but mutual fund portfolio managers have long memories about such things.

The good news is that, at least today, each firm appears to have a sizable revenue base. Redline investors need to validate whether or not their customers will actually buy the next gen product. Sandvine’s U.S. client prospects still need to figure out if the Federal Communications Commission will let them “shape” internet traffic.

These two 2007 IPOs have a bit of time to “cut the suit to fit the cloth,” and get the cost structure right to accommodate for the change in the top line. However, that takes patience on the part of their investors, and this is something that’s easier said than done when stocks flatline.

On the bright side, there’s always that classic hide and wait mentality that we all occasionally suffer from: how much lower can the shares trade?

Disclosure: None