CSFB on SONS
FY4Q06 Results
Investment Thesis. SONS remains one of our two favorite investment ideas in
comm infra for CY07. 100% leveraged to and a leading competitor in the VoIP,
we believe SONS offers a strong NT and LT outlook, with operating
fundamentals well ahead of current investor expectations.
Results. SONS reported 4Q06 Rev of $79mln v. both CS and Street consensus
$68mln est.s and $63 – 64mln guidance. While no detailed financial results due
to ongoing stock option review, SONS noted GM declined Q/Q “modestly,” but
remains at the high end of SONS’s 58-62% range and inline with our 61.9% est.
Highlights. (1) Visibility/Rev Diversification. Bookings “well north of
$100mln” and Book-to-Bill “significantly greater than 1.” Rev and order
growth “extremely strong across all regions.” Def. rev up $12mln, or 14.6%,
Q/Q to $94 mln. Notwithstanding approx. $20mln, or 70%, Q/Q decline in
KDDI rev, total rev increased Q/Q by $11mln, or 16.2% driven by approx
50% Q/Q increase in rev from rest of cust base. 64 total cust.s incl 10 new
cust.s; top five (incl two 10%, Level3 and first time Opal/Carphone) accted for
51% v. 71% in preceding qrtr. Other cust.s, incl Tier 1, not yet announced.
Expansion orders from existing cust.s; new orders for new appl.s from existing
cust.s; and first-time orders from new cust.s. (2) Tier 1. VZ returned in CY06
following termination of NT’s 18-mnth exclusive. Expansion of enterprise
access network by DT’s T-Systems div to all enterprise, from just large multinational,
cust.s. Expansion of business with T. SONS now counts four of top five global
carriers as cust.s. (3) Wireless & Access. Wireless and access finally beginning
to contr meaningfully to rev.s. SONS infr handling 30bln min.s per month of VoIP
traffic, 10bln of which is wireless. res or enterp access VoIP cust.s.
Guidance/Estimates. SONS expects 2H07 rev growth around 25%, with 2Q07
moderately outpacing 1Q07. The only change in our model is an increase in
FY07 and FY08 tax rate to 35% from 8.6% and 33.5%, respectively, which
lowers FY07 PF EPS by $0.08 to $0.20 (incl $0.04 ESO) and FY07 by $0.01 to
$0.33 (incl $0.03 ESO). 4Q06 oper results bolster our conviction that our
unchanged Street high rev forecasts will prove conservative.
Valuation. We continue to believe that SONS offers one of the most compelling
small-cap ideas in the comm infra industry, with significant upside opp and ltd
downside risk. Our 12-month $11 price target is driven by applying a 30x
multiple to our FY08 $0.36 PF EPS (excl. options exp) estimate. |
