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Procera Networks, Inc. Message Board

  • petercohen33 petercohen33 Aug 8, 2013 11:03 AM Flag

    Stifel Company Update Aug 8th

    Solid quarter and guide but weak 3Q GM means profitability pushed into 4Q

    Procera posted a slight beat in revenues for Q2 and the company’s strong trail
    activity and follow-on orders give optimism that the company can execute on its
    30% y/y growth target for 2013. Wins and trails include a tier-1 operator in Europe,
    one tier-1 operator in Asia, and an Intelligent Policy Enforcement partnership deal
    with leading carrier Tata Communications in India.
    On the negative side, while gross margins rebounded from an abnormally low 1Q,
    they will once again decline in 3Q due to a large deployment by a mega-carrier (we
    believe British Telecom; see page 2 for details) that will focus on low margin
    hardware initially. Margins should rebound in 4Q and beyond due to higher margin
    license sales to this carrier. Additionally, book to bill was below 1 at 0.88.
    We maintain our Buy rating. While overall the DPI space continues to be lumpy in
    terms of revenues and margins, Procera's momentum remains solid. We advise
    investors to focus on annual results versus focusing too much on quarterly
    fluctuations. Procera's valuation still looks compelling at 2.0 EV/2014 sales
    compared to higher than 2.5x for closest competitor Allot. The company also has
    around $5.54 in cash/share.
    Results: Revenues came in at $17.8m, better than our $17.4m expectation. The
    revenue includes the $2.2m which was deferred from 4Q. The company had three
    ten-percent customers, accounting for 48% of total revenues. Gross margins were
    up 750bps q/q to 62.1% after unusually low gross margins in 1Q that was the result
    of a one-time investment in a data analytics project for a large customer. However,
    gross margin will once again drop sharply back to 50% in 3Q due to an atypical
    deployment at a large carrier (we believe British Telecom), which will see mostly
    low margin hardware revenues recognized in 3Q with higher margin licenses likely
    recognized starting in 4Q. Operating expenses increased to $11.6m, up $0.89m

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    • sequentially due to increased hiring, investments to support future growth, and to
      fully reflect the Vineyard acquisition. Loss for the quarter was ($0.02), better than
      our expectation of ($0.05) due to lower (and more normalized) R&D spending.
      Book-to-bill was below 1, with bookings of $15.7m.......
      Results: Total revenue was $17.8m, up 22% y/y, and up 26% q/q (Procera finally
      recognized the $2.2m deal pushed out from 4Q12). The result was above our
      estimate and consensus estimates of $17.4m. Product revenue grew 15% y/y to
      $13.6m. Service revenue grew 50% y/y to $4.2m. Bookings were up 11% at
      $15.7m, compared to $14.2m last year. Book to bill was less than 1 at 0.88. Gross
      margin was 62.1%, up 750bps from the previous quarter due to a one-time
      investment in a data analytics project for a large customer abnormally lowering
      gross margins in the previous quarter. Operating expenses increased 8% q/q to
      $11.6m as a result of increased hiring, investments to support future growth, and
      to fully reflect the Vineyard acquisition. EPS was ($0.02), better than consensus of
      ($0.03) and our estimate of ($0.05).
      Customers and Trials: Procera reported 10 new service provider customers with
      2 being mobile operators. The company also received orders totaling $4.0m from
      two European mobile operators (one a tier-1) and one Asian tier-1 mobile
      operator. New customers made up 28% of revenues. Customer contribution in 2H
      should shift toward more new customers and will likely be more balanced between
      new and existing customers. Tier-1 trials numbered 16 (versus 18 last quarter).
      The company had three 10% customers, accounting for 48% of revenue.
      Customer mix was mobile at 48% of revenues, cable at 28% of revenues and
      fixed operations at 12% of revenues, and 12% higher education/enterprises of
      The deal impacting margins in Q3: The company announced a large follow-on
      order from a tier-1 service provider for the PL20000. We believe this customer is
      British Telecom.

      • 1 Reply to petercohen33
      • This customer will launch service in 2H 2013 with a higher
        booking of lower margin hardware in Q3 and revenue recognition of higher margin
        licenses later on (likely within 1-2 quarters after 3Q) as subscribers get turned up.
        This shift in hardware-only revenues from the account will impact gross margins in
        3Q. We believe that British Telecom is using Procera products to build a sports
        channel, opening a marketing battle with BSkyB to offer subscribers a compelling
        bundle of television, broadband and telephone services. The carrier is investing a
        billion pounds as part of this venture. British Telecom has become the second
        Premier League Football broadcaster in Britain after BSkyB. In the upcoming
        season, BSkyB will offer 116 games while British Telecom will offer 38. BT
        broadband subscribers will be able to stream the games for free to their PCs or
        watch the game via an app on their smartphones or tablets. The key for both
        British Telecom and Procera will be to sign on subscribers – more subscribers will
        result in higher license payments to Procera. Overall, the British Telecom
        deployment showcases the many uses of DPI beyond simple subscriber
        Tata Communication partnership: Procera announced a partnership with Tata
        Communications to enhance its mobile network operator (MNO) managed
        services portfolio. We believe the deal replaced a competitive solution. Tata
        Communications' Hosted Policy Engine (HPE) is a management and enforcement
        platform that offers customers reduced complexity, costs, and time for deployment
        and ongoing operations. The hosted implementation provides a pre-integrated
        best-of-breed policy control infrastructure solution on a "pay for consumption"
        basis. The platform enables service providers to granularly manage and monetise
        subscriber and application traffic across heterogeneous packet networks including
        CDMA, GSM, LTE, WiFi, and fixed broadband.

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