Coverage Initiated: Procera Networks Inc.

Contrary to popular belief, it is possible for a company to thrive in a recession - the company just has to deliver something its customers want (and need) so badly that the economy's condition isn't a concern. Well, I've got one for you today. This company has been quietly been progressing towards profitability despite a challenging environment, and I think it could actually turn the corner in the middle of this year. 
 

The stock is AMEX-listed Procera Networks Inc. (AMEX:PKT), which is an outfit that has developed - and is now delivering - a Deep Packet Inspection (or DPI) solution to over 400 clients so far, and more are on the way. 

Say what? Yeah, we had to review the description of 'Deep Packet Inspection' a couple of times as well. We'll explain it all in enough detail below. First though, we want to look at the more important matter.... the numbers. 

The basis for our optimism is real growth in the top line, and the commensurate improvement in the company's bottom line. Procera is pre-profit as of right now, but take a look at the trend...see if you see what we see. 

The nearby chart tells the story fairly well. The company pulled in $1.7 million in Q1 of 2008, then $2.6 million, then $2.7 million, and then topped off a record 2008 with fourth quarter sales of $4.5 million. EBITDA took a turn for the better starting in Q3, while the net loss started to shrink considerably in Q4.

So what? 

Their flagship 'PacketLogic 1000' product didn't launch until May of last year. The company saw an immediate boost in sales flow, and it's been growing - a lot - ever since. How much? Try this on for size.... the company added 200 customers in 2008, two of which were tier-one ISPs. That doubled the number of clients for the company, which tells me one thing - this PacketLogic 1000 solution is in big-time demand.

Even more exciting, however, is what the company hasn't done yet ...which is penetrate the bulk of the network traffic control market.

Independent research has suggested the market size for deep packet inspection could reach $1 billion by 2012. Procera recently identified approximately $45 million worth of potential new clients that could be garnered in 2009, but clearly that's only the tip of the iceberg.

Barring any extreme changes, we're anticipating 2009's quarterly revenues to come in at approximately twice the revenues achieved in each respective quarter of 2008, with the move to net profitability possibly occurring in Q2 or Q3 of this year. 

Based on the current sales growth trend, the size of the total market, the clear demand for the PacketLogic 1000 traffic control solution, and the possible swing to profit in the very near future, we're issuing a speculative buy rating on Procera Networks Inc. 
 

OK, But What Is It?

The reason Procera's PacketLogic 1000 has been so hot is a reason we've talked about before... the internet is getting crowded. There are too few 'pipes' and/or too much information being transmitted, and it's becoming something of a free-for-all. As such, the web basically needs a traffic cop to prioritize and route data being sent from point A to point B. PacketLogic 1000 essentially acts as that traffic cop.

Obviously that's the unscientific explanation, but you get the idea.

If you're a techie, then here's the heavy version (from wikipedia)...

"Deep Packet Inspection (DPI) (also called complete packet inspection and Information eXtraction - IX -) is a form of computer network packet filtering that examines the data part (and possibly also the header) of a packet as it passes an inspection point, searching for protocol non-compliance, viruses, spam, intrusions or predefined criteria to decide if the packet can pass or if it needs to be routed to a different destination...DPI allows the operators to ensure equitable bandwidth to all users by preventing network congestion. Additionally, a higher priority can be allocated to a VoIP or video conferencing call which requires low latency versus web browsing which does not. This is the approach that service providers use to dynamically allocate bandwidth according to traffic that is passing through their networks." 

In Other News

Back on April 6th we took a look at the CBOE Volatility Index (or VIX) for the first time in a long time. Why the hiatus? Because there was very little to talk about... the VIX was stuck in a sideways range.

Times are finally changing though. 

My line in the sand for the VIX was the support being made around 39.0. Care to guess where the VIX closed on Thursday? At a multi-month low close of 35.79... the lowest close since September of last year! The chart tells the story quite dramatically.

As for me, I'm taking this one at face value and interpreting it as a sign fear really is subsiding. As confidence continues to grow, so will the number of buyers. I expect to see some choppiness ahead, as there are still pockets of exuberance of scary proportions. However, the bears have had their chance to take their best shot, and it's yet to be good enough to dethrone the bulls. 

With this in mind, during the next pullback keep a closer eye on the VIX than on the index charts. The market may look ugly for a day or two, but if investors are truly thinking bearishly in the 'bigger picture', it will materialize in the form of a sharp rally in the VIX. The index charts themselves may or may not indicate what the market is truly thinking long-term - the VIX will. As is stands right now, the VIX says investors are getting more bullish.

I'll also have a breadth and depth update for you next week.