Sandvine just reported its Q1/08 results early this morning. Results look in-line with consensus, with sales of $8.3 million and a loss of -0.05. Expenses are rising at the company, with the big cost in the quarter, R&D, up 9% QoQ to $6.2 million. A silver lining to the quarter was gross margin, which increased 190 bps QoQ to 75.2%.
Mgmt did reaffirm its F2008 revenue guidance of $80-85 million – as expected, though no word on what Q2 will look like. Confident statements from CEO Dave Caputo were put out though: “While we remain dependent on the timing of operators’ purchasing decisions, we are very confident that the value proposition for Sandvine’s solutions remains strong. We firmly believe that we are in an emerging, high-growth market and we continue to manage our business accordingly.” What does this boil down to? Tier 1 carrier buying cycles are longer and more expensive to pursue compared with the traditional cable market. Recall that cable cos needed to deploy traffic management solutions early on in their cable Internet deployments due to the limited upload capabilities of their access networks.
On the new customer side, they added 4 new ones in the quarter, down from 10 last quarter, and 8 last year. Not a positive sign from a customer acquisition perspective, especially with competitor Arbor noting that they’re seeing customers pull in business in wireless at present. One of these customers is likely through Huawei, which does represent some upside in terms of business opportunties. Clearwire is a recent customer, but buying there too will be rocky in the near future with their WiMAX plans in the U.S. up in the air until the joint venture between Clearwire, Sprint + cable cos is worked out over the coming months.
Conference call at 8:30 am this morning…
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Stock is down 8% thus far, reflecting that there wasn’t really a lot of positives in the call.
Said Dave Caputo, “Service providers may be taking longer to make decisions, but the team is busier than ever…” – Unfortunately, this will translate into not a lot of visibility into these decisions and how they’ll do on a competitive basis. Meanwhile, pursuing these opportunities is clearly going to be expensive.
One area where mgmt thinks is a positive is BitTorrent’s recognition that carriers need to manage their traffic in order to maintain decent quality of service. The only thing that really needs to be cleared up is that this BitTorrent “the company” is different from BitTorrent “the technology”. The BitTorrent company is really pushing for the legal distribution of multimedia content over peer to peer filesharing connections. Clearly, the BitTorrent company doesn’t have a lot of influence over what illegal file sharers do or how they’ll change the technology going forward.
The takeaway here is that countries are starting to look closer and closer at service providers are doing to their customers’ traffic streams, and one possibility is that they may need to PROVE at some point that content providers are not having their content streams impeded, especially compared with the media streams being delivered by the carrier itself (e.g. Comcast’s video on demand service versus startup Vuze).
A couple of key points discussed on the call:
1) Does DPI available in other devices in the network hurt Sandvine? Yes, though Sandvine believes that their value prop is in being a discrete box. So for certain low-end opportunities, “DPI in other devices” could eat into the revenue opportunity.
2) The bigger problem is a move away from packet inspection for traffic management. With Comcast looking to distance itself from its previous traffic management scheme (resetting P2P upload connections through faking RST packets), would it be in Comcast’s best interest to upgrade its Sandvine equipment or to choose another vendor’s gear? In any case, no decision would be likely until the FCC rules – deploying prematurely for Comcast (or for other North American carriers for that matter) in the near term could get you fired if things take a 180 on you later on.
3) Managing traffic in a “protocol agnostic way” is easy – in other words, if carriers don’t deploy fancy 7-layer DPI boxes with flow state tracking en masse, there’s no way the $1B market projection from Light Reading makes any sense at all. I think the Arbor/Ellacoya deal makes a huge amount of sense though in this light because they’ll be building from a strength in security/denial of service, which is something that will only grow in importance over the coming years.
All in all, the “song remains the same” for Sandvine – still somewhat cloudy for the most part.
