Thomas Byrne, editor of The Periscope Report, specializes in finding small-cap companies with big ideas. Procera Networks (PKT) is one of his latest picks. Procera’s stock has already more than doubled in price over the last six months, but PKT is still small, and in the institutional ownership sweet spot, with just over half of the shares in institutional hands. The company’s stellar earnings, the stock’s incredible performance and a growing awareness of Procera’s industry (deep packet inspection, or DPI) should all combine to increase that percentage soon.
“Procera Networks, Inc. (PKT) provides network traffic awareness, analysis and control solutions for broadband service providers. It offers intelligent policy enforcement (IPE) solutions that enable mobile and broadband network operators to track and manage traffic over private networks. The company’s PacketLogic solutions provide report creation to answer important questions about network traffic and volume. ... PacketLogic is deployed at 600 customers, more than any of PKT’s short list of competitors.
“Management had provided revenue guidance for the full-year 2011 of $40 million, representing 100% growth over 2010. PKT surpassed this guidance by $4.4 million. Sales for the 4Q ended December 2011 increased 108% YoY to $15.6 million, after increasing 160% YoY in the prior quarter. Sales were up 28% sequentially.
“Product sales increased 115% YoY to $13.4 million, after increasing 190% YoY in the prior quarter. Product sales were up 33% sequentially. Support sales increased 71% YoY to $2.2 million, after increasing 66% YoY in the prior quarter. Support sales were up 4% sequentially. Support sales have higher margins.
“The gross profit increased 99% YoY to $8.7 million, after increasing 175% YoY in the prior quarter. Gross profit was up 16% sequentially. The GPM decreased 250 basis points YoY to 55.6%, down from 58.1% a year ago, and down from 61.2% in the prior quarter. With more product sales that support sales, the lower GPM is to be expected. It should go up in future years as the company moves to a recurring revenue model.
"[Procera] added 15 new service provider customers in the 4Q, exactly the same as the prior quarter. In the 4Q, PKT won two new Tier-1 customers in Asia-Pacific and Western Europe, and received significant multi-million follow-on orders from a leading European fixed/mobile operator and a leading North American cable operator.
“PKT added six new Tier-1 customers in 2011 across fixed/mobile and cable broadband service providers. Another 16 direct Tier-1 trials are ongoing or planned over the next 90 days. Two trials turned into customers in the 4Q. PKT now has 18 Tier-1 customers. The momentum with cable customers continued with the significant follow-on orders, including several in the millions.
“PKT has strong traction in the cable market, where it had continued success in displacing existing solutions. Looking forward, there are important opportunities within fixed line operators for displacement, as well as for deployment of PKT solutions where none existed before (an important premise behind our recommendation).
“PKT introduced the new PacketLogic Report Studio solution in the 4Q that provides customizable analytics that enables broadband service providers to effectively operate and monetize their networks. This product tracks network usage, and provides analysis of streaming video, among other functions. This provides network operators with new revenue streams, the most important problem they face right now. In other words, the amount of traffic going across networks doubles every month, mostly due to streaming video, yet network operators had no way to charge more money for this traffic until PacketLogic came along.
“In the conference call, CEO James Brear said he expects 30% revenue growth in 2012, which we think is very conservative guidance. In 2012, 50% of revenue will come from follow-on orders, and the other 50% will come from new business. To better address the global demand management expects in 2012, PKT doubled the size of its sales and field engineering teams in 2011. The company hired a new head of global sales, Brian Ahearn, who has extensive contacts overseas.
“Mr. Brear said PKT will ‘leave the pack in 2012' because it has the fastest technology. For example, the new PL20K product can handle a network with 10 million subscribers, and has 320 gigs per system. This is the fastest product on the market. There are 10 trials underway with this product, with initial sales expected in the 2Q of 2012. ... We are recommending PKT because it has an exciting new technology that is quickly becoming a necessity. The company is just three years old and it is already the market leader, and it will increase its market dominance in 2012, according to the CEO.
“It has a market opportunity that will grow 30% - 50% per year for the next five years. The market is less than 10% penetrated and there are few competitors. PKT has the fastest technology, which makes the barriers to entry very high. PKT has the best R&D team in the industry and a CEO who has 20 years experience in sales. The company has a ton of cash versus no debt, and it is generating positive cash flow. All these attributes make PKT our favorite Top Recommendation right now.”
- Tom Byrne, The Periscope Report, 406-465-4663, March 1, 2012