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
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
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.