Sandvine Corporation

Sandvine is the industry leader of Deep Packet Inspection (DPI), technology to analyse network traffic and then apply policy control to classify traffic, policy decision and enforcement, network management and optimization, and to deploy security solutions. Sandvine sells to network operators who predominantly offer their services through cable, DSL, or mobile infrastructure. Sandvine sells custom built equipment but its software, which can be deployed virtually on customers’ equipment, is their real strength as evidenced by their high margins. Recently Sandvine has also been expanding their servicing offerings to include smaller Mobile Virtualized Network Operators (MVNOs), helping those customers be innovative and competitive to larger network operators, resulting in Sandvine’s revenues being less concentrated but more complex. I have been investing in Sandvine since 2009 and have met with management numerous times. Their revenue and earnings have recently been spotty but not horrible and I still expect their growth trend to continue in the long term. Over the years, Sandvine has evolved from selling predominantly to U.S. Cable operators (where Comcast was the largest customer by far) to having a more diversified revenue base internationally and expanding into wireless and DSL operators. In 2007, Comcast was 49% of their $73.7m in revenue of which 89% came from North America. In 2016, they had no customers over 10% of their $121m in revenue of which 32% came from North America, wireless was above 50% of their revenues, DSL was next and cable was third. Ultimately I see Sandvine as a takeover target but management wants to grow the business and is in no hurry to sell prematurely. Sandvine reports in $U.S. and cash makes up almost half of their market capitalization hence why I focus on their valuation excluding their cash which is 11X trailing earnings. Sandvine previously paid no taxes, last year they had a minimal tax rate and now they are moving into a more normal tax rate. While this has a short-term pressure on net income, growth should become apparent. My target weight for Sandvine is currently around 5% of my entire portfolio which I am a bit below, I would be willing to take that up as their execution becomes more consistent, relying more on growth than floor valuation.

Sandvine Reports in $U.S. but their stock price is in $Cdn

P=2.95, fx 1.343, TTM EPS .12, P/E=18X, ex cash P/E=11X

s/o=126,078,045, Market Cap 371.9m, div $0.08, 2.7% yield, 0.88/sh in cash, Non-cash NWC>def revs, TR 27%

Sandvine agreed to be acquired first by Vector then by Francisco Partners after their 2nd bid was not matched. I am disappointed to see this company go private at what I feel is still a low price given its opportunity however it's time to move on and focus on what is rather than what we would want.

1Q17 .03 vs .05, est .02

Revs -2.4% to 33.3m, GM 73.8% vs 76.2%, lower from service revenue, product GM flat, OM 17.5% vs 24.3%, OpInc -30% mostly on lower GM (lower maintenance catchup)
Received initial orders from 8 new customers, recognized revenue from 10 new customers. B/B>1, 0 10% customers, cable still soft but now lapped.
In 2Q announced 3m in orders from an existing customer in CALA
Pleased with progress on patent suit, repurchased 6.3m shares, additional 3m post Q
Reasonable quarter, revs 3m ahead of estimate, encouraging to see non-cable revs pick up and revs improve q/q, strongest quarter in Asia Pac by a long shot, the softness in cable is now anniversaried, earnings will be at a full 27% tax rate vs minimal last year (difficult y/y EPS comps for the remainder of the year). Now 11X trailing EPS ex cash but earnings power should be stronger than that trailing EPS of .12