PKT Procera Networks, Inc.

Procera Networks Inc. (PKT) has beaten the Zacks Consensus Estimate in five of the past six quarters, amassing an average surprise of 97.2% over the last four. The most recent beat in its third quarter has led most analysts to raise their earnings expectations in the past 7 days. As a result, this provider of intelligent policy enforcement solutions achieved Zacks #1 Rank (Strong Buy) status on November 9. Moreover, its long-term projected growth rate of 26.3% makes it a solid growth pick.

Impressive Third Quarter

On November 6, Procera Networks reported third quarter earnings of 14 cents per share, which was flat on a year-over-year basis while trouncing the Zacks Consensus Estimate by 55.6%. The impressive results were primarily driven by improving top-line growth in the quarter.

Revenue jumped 31.7% from the comparable prior-year quarter to $16.1 million, in line with the Zacks Consensus Estimate. The better-than-expected growth was driven by solid performances from product sales (up 27.8%) and services (up 50.8%). Mobile customers contributed 45% of total revenue. New customers contributed 57% of the total revenue while the remaining came from follow-on orders.

Operating profit surged 27% year over year to $2.6 million. However, the operating margin pulled back 60 basis points (“bps”) to 16.4%, primarily due to higher operating expenses (up 64.8% year over year).

During the quarter, Procera added 11 new customers across its operating segments that included cable (22% of total revenue), fixed (17% of total revenue) and mobile. The company also received five additional orders from existing Tier 1 customers. Customer awards for higher education (16% of total revenue) reached 50 during the quarter.

Procera continues to expect 40% revenue growth year over year to reach $62.0 million by the end of fiscal 2012.

Earnings Estimates Move Higher The past 7 days have seen a number of positive estimate revisions for this year and next. The Zacks Consensus Estimate for 2012 is up nearly 14.3% in that time to 40 cents per share, as 5 of 6 estimates got a boost. The Zacks Consensus Estimate for 2013 is at 57 cents, up 3.6% in the past week as half of the 6 estimates advanced.

Reasonable Valuation

Currently, Procera is trading at a premium to most of its peers based on P/E, P/S and P/B. Its strong earnings growth expectation of 26.3% over the next five years compares favorably with the industry average of 10%, indicating room for further expansion.

Historically, share prices have shown positive correlation to earnings growth. The uptrend in the 2012 earnings estimate should encourage investors as the stock is likely to follow the trend.

Fremont, California-based Procera develops Intelligent Policy Enforcement solutions based on Deep Packet Inspection technology, which helps network operators to improve the quality and longevity of their networks. Its solutions also help in solving security hazards. Procera faces stiff competition from the likes of Brocade Communications Systems Inc. (BRCD), Cisco Systems (CSCO) and Juniper Networks Inc (JNPR).

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