One idea I've been sitting on for a few weeks is Starent Networks (STAR) - the chart has been doing well for many months - before the rest of the market came to life in fact. You can see throughout February 2009 as the market fell off a cliff, the stock held its range and never broke any key support areas. Those generally are leaders of the next move up. With the latest earnings report the stock has taken off the stratosphere. I am sure without looking this is the type of stock at the top of every Investor's Business Daily chart so I don't want to chase it - even though chasing extended stocks has been the order of the day to make large wins in the market lately. But I like the space it is in, and the longer term potential so I thought I'd take some time to do a longer piece even as we are in the middle of a flood of earnings.
I'm a big believer in the mobile, wired world - there are some very obvious large cap names that everyone knows and loves. The danger with smaller or mid cap names in the space (tech) is larger competition sees nice margins in a space and stomps in bye bye profits. I've had this happen to me many a time over the years. Perhaps Starent Networks will face the same fate... but thus far it looks promising. Essentially the company provides "guts" for the 3G Network in which it is a dominant force, and hence will prosper (although with much more competition) in 4G.
Some articles from TheStreet.com give a good plain English overview - here and here
- Starent has enjoyed its dominance as a supplier of hardware and software to help telcos better manage resources and deliver media and advanced services to smartphones. Stated in English, they help make the Internet happen on smartphones.
- The Tewksbury, Mass.-based company has two telco customers in the U.S., Sprint (S Quote) and Verizon, which make up 90% of the company's total revenue.
Which is exactly the issue here to some degree - while Starent is dominant in 3G, these juicy profit margins are attracting competitors (of much larger scale) to the space for 4G.
- Alcatel-Lucent named Verizon Wireless as a customer for its packet core technology as the No. 1 telco plans its 4G network construction strategy, according to an announcement Wednesday at the CTIA wireless show in Las Vegas. "Now it appears clear that Starent's sole-sourced position at Verizon, where it derives close to 80% of its revenue, post the Alltel acquisition, does not survive into the next generation of technology," JPMorgan analyst Ehud Gelblum writes in a research note Wednesday.
- With nearly a lock on the market, Starent managed to sustain plump 78% gross margins last year. Gelblum estimates that Starent's current 3G gear sales will not be affected, but he says Starent will face a stiff challenge in the upcoming 4G, long term evolution (LTE ) build-up.
- Verizon's 4G or long-term evolution (LTE) network upgrade with core packet gear is "a three-horse race," William Blair analyst Anil Doradla wrote Monday. These horses include Starent, Alcatel-Lucent and Ericsson (ERIC Quote). And while Starent has been dominant in 3G at Verizon and Sprint (S Quote), the opportunity to supply 4G gear to AT&T (T Quote) seems nil, Doradla
- Perhaps of more concern for investors are the dashed hopes of a buyout. Starent's stock had more than doubled since November largely because of anticipation that some larger player would acquire the company to gain a piece of the 4G spending. "The biggest near-term negative impact for Starent could be a reduced takeover potential as Alcatel-Lucent," Gelblum writes, has now joined Ericsson and Nokia Siemens Networks in having its own internally developed 4G packet core solution."
We'll look at some metrics from their last earnings report and than an Investors Business Daily story from February is at the bottom of the post. Full earnings report here - some snippets below; via Reuters
- Starent Networks (STAR), which helps mobile operators deliver multimedia services to subscribers, posted a 32 percent rise in quarterly profit and lifted its earnings outlook for the year, driving its shares up almost 13 percent.
- For the first quarter, the company earned $12.8 million, or 17 cents per share, up from $9.7 million, or 13 cents per share, a year ago. Excluding items, it earned 22 cents. Total revenue jumped 30 percent to $73.2 million. Product revenue, which accounted for more than three fourth of the total revenue, grew 29 percent, while services revenue rose 38 percent.
- Analysts expected earnings of 16 cents a share, before items, on revenue of $72.1 million, according to Reuters Estimates.
- Starent, which counts Sprint-Nextel (S) and Verizon (VZ) Wireless among its biggest customers, said on a conference call that it expects a profit of 71 cents to 74 cents a share in 2009. The company, whose infrastructure equipment is used by wireless carriers to offer video, multimedia messaging and voice-over-IP services, had previously projected earnings of 65 cents to 68 cents a share for the year.
- Cantor Fitzgerald analyst Edward Jackson said the solid first-quarter results demonstrated that the company continues to benefit from the robust growth of wireless data services. "As long as the robust rates of data services continue, they'll perform well," Jackson said, adding wireless data was the fastest growing area of communication services.
From Investors Business Daily February 2009
- Smart phones are getting smarter. More and more customers want more messaging, video and other data delivered to their handhelds. That means cell phone infrastructure systems need dramatically more bandwidth.
- The Tewksbury, Mass.-based company ended 2008 with record sales and revenue, and a growing base of cellular systems around the globe as customers. It's guiding for double-digit revenue growth again in 2009.
- "They've done a good job of going out and getting very large, well-funded carriers as customers. That's why they have this kind of visibility in this kind of market," said Deutsche Bank analyst Brian Modoff.
- The company's biggest customer, Verizon Wireless, is the largest cell company in the U.S. It also serves top and second-tier cell companies in places such as China, India and Europe.
- Analysts say Starent's more scalable and flexible systems give it an edge over competitors. When someone makes a cell call, a radio signal reaches out to the nearest cell tower. That tower then routes the data to Starent hardware, which breaks the data up into packets and moves it on to the Internet. As those packets travel, Starent's network tracks who the customer is and which services he or she is using to facilitate billing and customer management.
- Starent's systems are already compatible with earlier cellular technologies still in use, as well as the now high-end third generation, or 3G systems. The company says simple software upgrades, rather than full-scale equipment replacements, will make its systems compatible with the coming 4G networks as well.
- Its top five customers accounted for 93% of revenue in the fourth quarter. Verizon alone made up 60%. But that large customer reliance used to be worse, analysts say. "The trend is going in the right direction," Modoff said. "But the risk in the name is that one of these companies, particularly Verizon, doesn't spend as much in a quarter."
- The company lists China Unicom (NYSE:CHU - News), that nation's second-largest cell carrier, as a customer. And analysts think the largest, China Telecom (NYSE:CHA - News), is onboard as well. Those are potentially important customers as China switches over to 3G systems. The company expects China to spend more than $40 billion over the next two years in system upgrades.
- About 37% of the phones Verizon sold in the fourth quarter were smart phones, up from 30% the quarter before. It expects higher average revenue per user, thanks to the data plans customers buy with them.