Procera Networks Inc. (PKT) – Buy
PKT: Classic Tier 1 Transition – Weakness Is Buying Opportunity—Cutting Estimates on
Up-Front Investments But Longer Term This Is Good News
Procera Is Experiencing Growing Pains—A Particular Type of
Growing Pain Called the Tier 1 Service Provider Challenge. The holy
grail for most network equipment companies is winning big Tier 1 Service
Provider contracts. The biggest challenge to a small company is,
ironically, winning and succeeding with big Tier 1 contracts. Tier 1
Service Providers require more support and installation services and have
many more acceptance criteria than smaller service providers. We see
Procera as a victim of its own success, but this is a quality problem. More
importantly, in our opinion this is not the time to sell the stock but instead
the time to Buy these shares.
• Yes, We are Cutting Estimates. However, the reason we are cutting
estimates is heavy up investment in order to support strong orders from
Tier 1 customers.
• Shifting Revenues More to 2H from 1H. Most investors get spooked
by companies that shift revenue timing out. How do you know it’s not
going to slide out again? However, this is normal with Tier 1 service
provider wins. Tier 2 Service Providers generally have few acceptance
criteria. Tier 1s almost always have Revenue acceptance criteria. It is
much harder to call the timing of Revenue recognition.
Why are We Remaining at a Buy?:
1. First Inning: The industry is in its very early stages of adoption.
2. Strong Orders: PKT had 124% order growth in 4Q
3. New Customer Mix: PKT had over 40% of orders from new
customers in 4Q, the best percentage in the industry
4. Tier 1 Wins and Trials: PKT had 7 Tier 1 wins in 4Q and 19 Tier
1 trials in 1H—This is a strong indicator of future orders
5. New Product Ramp: PKT’s PK 20000 product is just starting to
deliver revenue in 4Q and should ramp into these Tier 1 wins
6. Margin Rebound in CY14: The investment should lever CY14
7. Valuation: PKT is at just 9.3x EV/E on CY14 estimates
Yes, we are cutting estimates, but the reason is a wealth of demand
from much bigger customers. This is a quality problem.
Not sure where Needham is getting Tier 1 wins in Q4 = "4. Tier 1 Wins and Trials: PKT had 7 Tier 1 wins in 4Q and 19 Tier"
If I understand well per Q4 CC - 4 T1 Wins include:
- U.S. fixed line service provide
- Middle Eastern mobile service provider,
- Eastern European cable provider
There were 13 Tier 1 Wins in 2013 and 7 of them were Mobile.
Always respect Needham view on stock reports this one was no exception, Glad i averaged in on the 500 i bought @16. w/16.00 & another 1500 at $11.81, I'm very disappointing with ALLT bad showing, did sell 1/3 at $25. still in the green on that but not by much, now it's in for the long wait. Thanks for the post have a good weekend. Pump
Sales guys always forget that you have to "find" the price of any product based on how many of them you can sell. If it is taking them more than 120 days to close a deal, they've got some demand issues.
Hirsute not sure exactly what you are referring to, i believe you are focused / concerned about 2 million plus order that did not get booked in Q4 and unfortunately was pushed out / caused #'s to miss expectation. Clearly in this particular case customer after order was delivered received installed and in production for MANY months wanted a additional feature. Welcome Procera to your new customer / introduction to the Universe of working with larger / larger Service Provider. I was shocked after speaking with someone in the know that this business was not able to be booked during Q4. Procera has bulked up Service and Support facet of their business both positioning and anticipating growth in Customers & order flow.