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Procera Networks, Inc. Message Board

  • petercohen33 petercohen33 Nov 6, 2013 1:19 PM Flag

    Stifel , Strong Q4 guidance; pipeline at record levels; entering 2014 with momentum

    Procera posted a solid Q3, beating expectations on both revenues and EPS. The
    company maintained full year guidance of 30%, which compares to a decline of
    10% for 2013 for closest competitor Allot. Overall, while there haven’t been any
    large visible wins this year (compared to 2012, when the company won British
    Telecom and Softbank), the company exited the quarter with a large funnel, won 5
    tier-1 deals in Q3, added 18 new service provider customers during the quarter,
    and had book-to-bill of slightly above 1. The large tier-1 service provider in
    Western Europe (we believe British Telecom), that impacted gross margins due to
    a more hardware-centric deployment, generated around $5-$6 million in sales in
    Q3. Contribution from that carrier will be around $2 million in the December
    quarter; consequently, in order to achieve guidance of around $24 million for Q4,
    other customers will have to grow around 40% sequentially. We believe that the
    company has multiple ways to get there including three tier-1 deals in the pipeline
    along with numerous smaller deals (overall, the funnel heading into Q4 is higher
    versus heading into Q3 with a robust pipeline out of Europe). We believe that if one
    of the tier-1 deals closes, along with some of the smaller deals, Procera
    (predicated on revenue recognition) should be able to achieve its full year
    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 in winning
    new customers. The company clearly seems to be gaining share, especially in
    markets where it had poor representation before – Europe and Latin America – as
    the sales hiring from last year is paying off. We advise investors to focus on annual
    results versus focusing too much on quarterly fluctuations. Procera's valuation still
    looks compelling at 1.9 EV/2014 sales compared to higher than 2.5x for closest
    competitor Allot. The company also has around $5.43 in cash/share.

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    • Results: Total revenue was $21.3m, up 33% y/y, and up 20% q/q. The result was
      above our estimate and consensus estimates of $20.6m. Product revenue grew
      26% y/y to $16.3m. Service revenue grew 62% y/y to $5.0m. Bookings were up
      44% q/q at $22.6m, compared to $15.7m last quarter. Gross margin was 50.3%,
      down 11.8% from the previous quarter due to a large mega-carrier deal (we
      believe with British Telecom) with a high initial low-margin hardware deployment.
      Operating expenses increased 33% y/y to $11.2m as a result of an organic
      increase in business, international expansion, infrastructure investments to
      support growth, and the Vineyard acquisition. EPS was ($0.01), better than
      consensus of ($0.07) and our estimate of ($0.06).
      Customers and Trials: Procera reported 18 new service provider customers with
      5 being tier-1 operators. New customers made up 71% of revenues compared to
      28% last quarter. Tier-1 trials numbered 16 (same as last quarter). Customer mix
      was fixed at 47% of revenues, mobile at 27%, cable at 15% of revenues, and 10%
      higher education/enterprises of revenues. The Pipeline was at record levels with
      several large potential deals. Large customers in Q3 included a new multi-million
      dollar deal with an APAC operator, a tier-1 mobile operator in Latin America, and
      a multi-million dollar deal with a tier-1 service provider in Europe. Through the
      Vineyard acquisition, the company won 4 new embedded customers during the
      quarter. The company also will begin trialling NFV versions of its products early
      next year.
      The deal impacting margins in Q3 (and into Q4): As a reminder, the company
      announced a large order in Q3 and a follow-on order in Q4 from a tier-1 service
      provider for the PL20000. We believe this customer is British Telecom. This
      customer launched service in Q3 using Procera's gear with a higher booking of
      lower margin hardware in Q3. There will be some software revenues recognized
      from this deal in Q4, with a larger piece in Q1 2014.

      • 1 Reply to petercohen33
      • Hardware delivery to this
        customer might accelerate in 2H 2014.
        Overall, we believe that British Telecom generated $5-$6m in revenues in Q3 with
        another $2m expected in Q4.
        New Partnerships: New partnerships in the quarter include SkyFire with their
        mobile video optimization solution, Rocket Optimizer. This is in addition to the
        partnerships announced last quarter with Tata Communications (via its Tata
        Communications’ Hosted Policy Engine) and Openet (via its Revenue Express
        policy control and charging solution). The company expects to announce a tier-1
        deal with Tata Communications in the near future. We believe the increased
        number of partnerships indicates the company is gaining traction in the
        marketplace as a leading DPI solution.
        Vineyard Networks Acquisition: The former Vineyard Networks contributed
        $0.80m in the quarter (up 31% q/q). Management commented the integration was
        going well.
        By Geography: EMEA was 45% of total revenue or $9.6m, up 86% q/q due
        primarily to the strong contribution from the tier-1 European operator. Americas
        revenue was 31% of the total or $6.6m, down 19% q/q. APAC had 25% of sales
        with $5.3m, up 20% q/q. The company commented that the Middle East, Latin
        America, and Japan saw strong growth. Overall, with increased sales hiring in
        international markets, the company believes that revenues from outside the
        Americas will be important going forward.

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