Will It Be A Prosperous 2014 For Procera Networks?

Jan. 23, 2014 7:58 AM ETPKT, CSCO, ALLT

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Procera Networks (NASDAQ: PKT) had an underwhelming 2013, as the stock dipped 18 percent during the year. However, the company seems set for a better performance during 2014 as it looks to diversify revenue recognition with an expanded set of tier 1 customers. The company provides equipment for deep packet inspections that help broadband and mobile carriers better manage their networks.

The Business

The company markets and distributes its products under the PacketLogic brand name. Its products include:

The Subscriber Manager, which integrates PacketLogic with network management and operation systems, as well as enables policy enforcement, per-user tracking, and location awareness.
The Intelligence Center, which provides the visualization of the application and subscriber intelligence gathered by deployed PacketLogic systems.
The Real-Time Enforcement platform, which utilizes various hardware platforms running the same operating software.

These three products are well aligned with the rapidly developing market in network integration and monitoring. Network companies are looking to diversify their revenues by introducing new revenue streams within their product lines. Procera Networks' systems and equipment are critical for these companies to implement their expansion plans. Many will be looking to roll out triple play subscription networks to their customers (which also include video streaming) where LTE broadband networks are crucial.

Procera Networks also stands to gain from the growing market in software-defined networks, where software provides the heavy lifting for managing company information networks. This opportunity lies squarely on the path of the company's Subscriber Manager Product line-up.

Projections

Over the last four quarters, Procera Networks EPS grew by just 3.6 percent. However, according toprojections, the company's earnings per share are expected to grow by a massive 728 percent over the next four quarters. This should help boost Procera Networks' stock price over the same period. With the growing market in software-defined networks, which helps company maximize its profits, Procera carries 30 percent in CAGR for EPS. Therefore, this indicates that the company is clearly set to grow massively in 2014, and over the next five years.

Improving Margins

Procera has an impressive gross margin, but its operating and net profit margins are underwhelming. However, as the company diversifies revenue recognition with expanded tier 1 customers, the operating margins are likely to improve going forward; as well as the net profit margins. It faces competition from industry giant, Cisco Systems (NASDAQ: CSCO) whose gross margin stands at 61 percent, and has an operating margin of 24 percent. However, another rival, Allot Communications (NASDAQ: ALLT), with a market cap of $495 million, seems to face the same problems as does Procera. It has a strong gross margin of 72 percent, compared to an operating loss of 11 percent. Procera Networks has a market cap of $303 million and gross margin stands at 56 percent, while operating loss is pegged at 17 percent.

Conclusion

Even with a price to sales ratio of 4.27x, Procera Networks seems to be undervalued when compared to the industry average of 14.87 in P/S. Allot Communications seems to be slightly expensive as well, with a P/S of 5.18, while Cisco Systems is the cheapest among the three with a P/S of 2.41x. Procera Networks also carries an attractive P/B ratio of 1.97, in an industry where companies tend to trade at much higher P/B values.

The bottom line is that with impending revenue and earnings growth in 2014, Procera seems set to have an impressive campaign this year and over the next few years, as the market in software-defined networks continues to grow.

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