Sandvine feels the pain

Sandvine feels the pain

by: Simon Avery

Few young Canadian firms have faced such great expectations as Sandvine Corp.

Its leading-edge technology and origins at the University of Waterloo led some optimists to suggest it could be the next Research In Motion Ltd. The earlier success of its founders and investors, including Sir Terence Matthews, bestowed on it an air of royalty within Canada's tech community. And sitting atop Deloitte's 2007 list of fastest-growing tech companies in the country (42,000 per cent over five years), Sandvine couldn't help but command the respect of business leaders.

This was the company that closed the book on the ugly tech bust in Southern Ontario with its IPO in 2006.

Yesterday, the long adulation of Sandvine ended. Its stock fell 42 per cent to a new low of $1.55 on the Toronto Stock Exchange after the company warned that revenue this year will be about 20 per cent less than the previously reduced estimates it gave in December.

“I am bitterly disappointed,” said Peter Misek, a Canaccord Adams analyst. He didn't blamed management, but his own “blindness and love” for the company's technology.

Sandvine makes software and hardware that tells cable operators and phone carriers what type of traffic is running over their networks at any moment, allowing them to adjust their capacity and their security. As music, video and gaming drives up demand for broadband, most experts assumed service providers had no option but to invest to make networks more efficient.

Two events, however, have suddenly changed that common wisdom, Mr. Misek said. The credit crunch is making it difficult for the telecom industry to refinance its debt – as they pay more to issue bonds they are being forced to cut spending. A new survey by Canaccord Adams of 40 global phone companies found that all are putting a freeze on capital expenditures.

Sandvine's troubles could be “the canary in the coal mine” for the entire network equipment industry, Mr. Misek warned.

The second event is the political hot potato in Washington, D.C., of Internet neutrality. As Sandvine and rivals like Cisco Systems create new tools for managing networks, U.S. regulators and lawmakers want to ensure service providers don't slow or block traffic from competitors or high-volume users.

The U.S. Federal Communications Commission last week held hearings on the matter and warned Comcast Corp. that it would not allow the cable giant to improperly manipulate Internet traffic. Comcast is believed to be Sandvine's largest customer, although the Waterloo firm doesn't identify who buys its gear.

Mr. Misek and other analysts say the spectre of new Internet neutrality rules is causing cable companies to hold off on purchases from Sandvine.

The company warned yesterday that sales for its first quarter ended Feb. 29 will be about $8.2-million, plummeting 88 per cent from a year earlier.

It said revenue for the full fiscal year should be between $80-million and $85-million, down from the range of $100-million to $110-million estimated in December. At best, that means annual growth of just 15 per cent, compared with 132 per cent a year earlier.

Sandvine executives declined to be interviewed about the shortfall or their strategy. In a statement, chief executive officer David Caputo said opportunities are not drying up, but customers are taking longer to make up their minds. “We believe that the delays have come about for a variety of reasons, ranging from unique customer-specific circumstances to economic conditions, making operators pause before executing on their approved budgets.”

View the original here: http://www.theglobeandmail.com/servlet/story/RTGAM.20080306.r-sandvine07/BNStory/Technology/home