CSFB update on SONS
Raising Estimates and TP.
Investment Thesis. SONS remains one of our two favorite investment ideas in
communications infrastructure for CY07. 100% leveraged to and a leading
competitor in the fast growing and still young service provider Voice over IP
market, we believe SONS offers a strong NT and LT outlook, with operating
fundamentals well ahead of current investor expectations. We are raising our
est’s and price target for SONS’s shares and believe the upside opportunity
over the next 12 months rivals the $2.49, or 50%, move over the past 120 days.
Raising Estimates. Ahead of SONS’s earnings report scheduled for Feb. 28th,
increasing our already Street-high CY07 revenue and PF EPS estimates to
$354mln and $0.31 and are establishing CY08 estimates of $464mln and $0.37.
These increases represent revenue and operating profit growth forecasts of
32.4% and 110% for CY07 and 31.4% and 76% for CY08. Muting CY08 EPS
growth, we assume full consumption of SONS’s available NOLs in 1Q08 and
accordingly apply 33.5% tax rate to our CY08 EPS estimate, up from 8.6%
applied to CY07 EBT. Driving these increases, we expect further gains by
SONS in what we expect to be an accelerating SP VoIP market in CY07 and
CY08, coming off of 13.4% growth in CY07. We continue to believe the
adoption of VoIP is in the early stages of a 10+ year secular investment cycle
and we expect to see market acceleration in CY07 and CY08 as an increasing
number of Tier 1 SPs move forward with VoIP deployments. We expect SONS
to benefit from continuing follow-on orders from both existing longstanding
customers such as Qwest, Level3 and Global Crossing, newer customers such
as Cingular and KDDI, initial revenue recognition from customers such as DT
and Sprint (the latter of which has not yet been announced; see our note,
“Customer Traction-Sprint-Nextel,” dated 9/20/06, and new customer wins.
4Q06 Outlook. In its 1/3/07 press release, SONS noted that it enjoyed record
orders and profitable growth ahead of the market in 4Q06. We expect SONS to
post 4Q06 rev and PF EPS at least in-line and more likely above our and Street
consensus $68mln/$0.03 EPS (incl $0.01 of ESO) forecasts. More importantly,
we are expecting a book-to-bill ratio of close to or approximately 2.0, with orders
approaching $150mln in the quarter, against what we believe are current
investor expectations of approximately 1.5 and $100mln, respectively.
Valuation. We are raising our 12-month PT to $11 from $7.80 based upon 30x
our CY08 $0.37 PF EPS estimate, excl options exp. We believe this multiple is
justified based upon our forecasted 50+% growth in SONS’s operating profits |
