CAPScall of the Week: Procera Networks


For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'm taking a closer look at Procera Networks

What Procera Networks does
Procera Networks deliver what it refers to as Intelligent Policy Enforcement solutions to carriers, service providers, and educational institutions. In layman's terms, Procera provides technology packets that enable these mobile and broadband carriers to manage aspects like data usage (i.e., bandwidth) and manage network congestion, and helps control threats for both educational institutions and service providers.

In Procera's most recent quarterly report, it recorded a 32% increase in revenue to $16.1 million, including a 51% increase in service revenue, as gross margin expanded to a record 72% and net income jumped 40% to $2.8 million from the year-ago quarter. Procera stuck with its full-year guidance that calls for 40% revenue growth as it added three new tier-1 customers during the quarter and received add-on orders from five additional current customers.

The competition
Like many of the seldom-followed companies featured in this series, there are both standard competitors for Procera, and other, less direct, figures that also bear close watching.

Allot Communications and Cisco Systems are the two most direct competitors to Procera in the deep packet inspection -- DPI -- spectrum, although their approaches are markedly different.

Cisco is a multibillion company with DPI software that's often integrated within servers. This means if a service provider wants to add addition software, more servers are needed. Allot and Procera offer their customers considerably more scalability with Allot aiming to win over customers by giving them more options and Procera targeting enterprises with high-speed DPI needs. Allot's recent troubles, caused by the expectation of an earnings miss from research firm Oppenheimer which downgraded the company on Friday, don't bode well or poorly necessarily for Procera since it's really targeting a different type of customer.

What Procera investors should really keep their eye on is spending levels by carrier and service providers. AT&T announced in November that it would be spending $14 billion on a three-year network overhaul to expand its 4G LTE platform. Likewise, Sprint Nextel's $8 billion investment from SoftBank will be used in some way to upgrade the company's largely nonexistent 4G LTE network. Considering that 45% of Procera's business came from mobile in the third-quarter, this bodes well for Procera.

The call
After carefully reviewing the prospects for Procera Networks, I've decided to make a CAPScall of outperform on the company.

I really took a trip in Doc Brown's time machine by revisiting Procera, a company I was notably bullish on in Dec. 2010 in my CAPS account, and I've decided even following its notable run higher it's well deserving of a long-term green thumb.

Procera's DPI software provides relatively steady recurring revenue, it allows for easy add-ons by existing customers, and it's pretty cheap on a long-term basis for carriers and service providers to use. Also, Procera is growing revenue at a phenomenal rate (consistently around 40%) and it's adding high-level customers into the fold. We appear to be on the cusp of another major infrastructure expansion in mobile and Procera's revenue, not coincidentally, is geared predominantly toward mobile service providers.

From a valuation perspective, Procera isn't the cheapest cookie in the cookie jar at 32 times forward earnings. However, taking into account that it ended the previous quarter with $133 million in cash and short-term investments, and backing that figure out of its share price, we get a much more reasonable 19.6 times forward earnings. That's a bargain if you think about the fact that Procera is growing by 40% per annum.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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