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Research Note
Starent Networks, Corp. (STAR)
Upgrade to Outperform from Neutral on Price and Catalyst
• Share price has become attractive. Shares closed yesterday at just under 21x 2010E (non-GAAP), having declined from 28x since July 24. During this period we have focused on potential for competitive initiatives to diminish the company’s opportunity to grow in the out years and have concluded that peer product cycles are not sufficiently challenging to avoid the price opportunity in the stock. • Competitive efforts remain status quo Our updated perspective is that the status quo will likely prevail with respect to UMTS/HSPA (current state of the art) and that the company’s competition plans to ride the LTE deployment wave to bring new packet gateway technology to market. This is not incrementally threatening since we believe Starent has a product pipeline to call or raise the stakes as operators make commitments to LTE and we think LTE may be a long time coming in many cases. We conclude that Ericsson prefers to focus customers on LTE for new products. Further, Cisco now emphasizes transport more and packet core less, effectively conceding the role of Starent, in our opinion. We believe these strategies are unlikely to disrupt the company at current customers, including Vodafone, which Starent shares with Ericsson. • We see potential for catalyst in partnering opportunities and deferred revenue/cash flow recovery. Past results do not imply future performance, but during the last three June quarters Starent saw deferred revenue decline followed by sharp increase in the September quarter in 2007 and 2008. We feel confident shares will trade higher if this happens again. Though we have no way of knowing in advance if this coincidence will repeat, we like the shares at the current price in case it does. On the partnering side we think so-called domain players (radio access network and/or transport infrastructure vendors) have become more aware of the company’s strong showing in trials and view Starent to be increasingly attractive for partnering to bid against Alcatel-Lucent and Ericsson. • Our $27 target is unchanged as are our earnings estimates and 3-5 year net income growth rate forecast of 25%. Our target is approximately 22x 2010 NOPAT plus current cash and the cash EPS we expect the company to generate between now and the end of next year. The only adjustment to our model is fining tuning 4Q09 revenue to a level that brings our full year estimate up to the mid-range of guidance, which is $315-$325 million. Our 3-5 year net income growth rate exceeds that of our forecast for 2010 because we think upside volume from Verizon this year makes for a tough comparison and that overseas business will drive more growth in the out years. • Risks to achievement of our target include the global economy, mobile network spending delays, sales execution and competitive attacks on the company’s network design-wins by large competitors with broader account control.
FYE DEC REV. ($m) 2008A ACTUAL CURR. 2009E PREV. CONS. CURR. 2010E PREV. CONS.
September 2, 2009 Price (close 9/1/09)
$19.62
Rating
OUTPERFORM
12- Month Price Target
$27.00
Matthew Robison (415) 263-6659 matt.robison@wedbush.com Leo Choi (415) 263-6669 leo.choi@wedbush.com
Company Information 52-Week Range Shares Outstand. Insider/Institutional Public Float Market Cap. ST / LT Debt Debt/Capital ROE Cash & Inv/Share Book Value/Share $7.30–$27.08 75.8 million 24% / 77% 60.9 million $ 1.49 billion N/A 0% 24.0% $5.15 $5.03
Company Description Headquartered in Tewksbury, Massachusetts, Starent Networks was founded in 2000 and provides data services infrastructure products for mobile network operators.
Communications Technology
Q1 Mar Q2 Jun Q3 Sep Q4 Dec Year** Change
EPS*
$56.2 61.2 66.1 70.6 $254.1 74.3%
2008A ACTUAL
$73.2A 78.3A 80.7E 87.8E $320.0E 25.9%
CURR.
80.7 86.1 $318.3 25.3%
2009E PREV.
82.3 88.5 $322.3 26.8%
CONS.
NE NE NE NE $402.1E 25.7%
CURR.
$400.0 25.7%
2010E PREV.
$89.2 94.3 98.1 106.3 $391.3 21.4%
CONS.
Q1 Mar Q2 Jun Q3 Sep Q4 Dec Year** P/E Change
$0.18 0.25 0.24 0.29 $0.95 20.7x 158.5%
$0.22A 0.25A 0.17E 0.17E $0.80E 24.5x -15.2%
0.17 0.17 $0.80 24.5x -15.3%
0.18 0.17 $0.82 23.9x -13.7%
NE NE NE NE $0.95E 20.7x 18.2%
$0.95 20.7x 17.6%
0.20 0.22 0.23 0.25 $0.91 21.6x 11.0%
Nasdaq.com
Consensus estimates are from Thomson First Call. * EPS is on a pro forma basis. ** Numbers may not add up due to rounding.
Wedbush Morgan does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see page 7 of this report for analyst certification and important disclosure information.
DISCUSSION Ericsson may focus on backward compatibility once capturing LTE business with new products, but we do not see efforts to pitch new SmartEdge products to UMTS/HSPA applications where Ericsson has bid earlier products. Further, Cisco now emphasizes transport more and packet core less, effectively conceding the role of Starent, in our opinion. We believe these strategies are unlikely to disrupt the company at current customers, including the Vodafone, which Starent shares with Ericsson. Management asserts 14 Vodafone regions have selected Starent products. The 14 Vodafone regions include Australia, Germany, Ghana, Hungary, Ireland, Luxembourg, Netherlands, New Zealand, Portugal, Qatar, Romania, South Africa, Spain, and the UK. Volatility of European currencies versus the dollar between Invoicing and payments associated with this business and business with Bouygues Telecom has been reflected in other income during the past two quarters.
Revenue Mix and Deferred Revenue Data
($mil/% of sales) By Channel Direct Indirect Rev from >10% customers/ # of >10% customers Total Revenue N/A N/A 85% / 2 (Verizon, KDDI*) $78.3/ 100% $70.3/ 96% $2.9/ 4% 75% / 1 $73.2/ 100% $64.3/ 91% $6.4/ 9% 64% / 2 $70.6/ 100% $54.1/ 82% $12.0/ 18% 79% / 2 $66.1/ 100% $55.6/ 91% $5.6/ 9% 85% / 2 $61.2/ 100% $53.7/ 96% $2.5/ 4% 91% / 2 $56.2/ 100% 2Q09 1Q09 4Q08 3Q08 2Q08 1Q08
Quarterly Deferred Revenue Current Long-term Total Deferred Revenue 139.6 7.0 146.6 151.7 9.2 160.9 141.7 11.0 152.7 143.3 7.0 150.3 109.9 8.0 117.9 128.6 9.6 138.2
Source: Company data and Wedbush Morgan research*
Opinion matrix: Positive (+), Neutral (~), Negative (-); valuation tables included elsewhere in this report Near term + Potential partnership with domain vendors like Huawei, Juniper or ZTE could improve visibility, especially if catalyst end-customers like AT&T are implied. Long term + The evolution of mobile networks as high speed data and multimedia content delivery mechanisms is in early catalyst stages. With a platform that can scale through the next technology generation, we think Starent is well positioned as a vehicle for shareholders to participate in the next industry growth phase. Relative Shares are priced at a moderate premium to revenue multiples of peers; however Starent has relatively high -/~ value margins that are proportional to the premium. Intrinsic + Based on our DCF, shares are priced at a discount to the implications of our forecast for 2009 and beyond. value Sentiment + We believe concerns over inability to participate in large deal have not only resulted in share price and sentiment opportunity but may also be unfounded.
COMPANY OVERVIEW Headquartered in Tewksbury, Massachusetts, Starent Networks was founded in 2000 and initially shipped its first product, the ST16, in 2003. The ST16 and the more recently introduced, higher capacity, ST40 are modular networking and computing architectures which the company describes as multi-media core platforms. When combined with the company’s applications modules, these platforms provide data services infrastructure for mobile network operators. For less bandwidth intensive applications, such as network control functions the company offers products such as the XT30 that run on general purpose hardware. With the ST40, we believe Starent is unique in offering a solution today that is software upgradeable for 4G network requirements. Because Starent products are utilized purely to manage data content the company is a direct investment in the high-growth segment of the wireless industry. Further, as the industry adopts IP for voice, we expect the company to handle that traffic as well. This is already the case of WiMAX installations, which are native IP (intrinsically VoIP), but for now mobile operators are content to segment non-voice traffic for IP infrastructure and leave voice on TDM, at least until it reaches core network transport infrastructure. Starent is distinguished in having grown to become one of the few successful recent entrants in wireless networking equipment. The company has been successful against Alcatel Lucent, Cisco Systems, Ericsson, Huawei and Nokia Siemens Networks by focusing on solving problems for carriers that are specifically associated with scaling data revenue. Carrier unit revenue associated with data, smart phones and increasingly mobile Internet devices (MIDs – netbooks and laptops) has reversed the declining trend in overall unit revenues for mobile operators, but it has also resulted in rapidly escalating network traffic. While data traffic is driving revenue for
2 | Starent Networks, Corp. Matthew Robison (415) 263-6659 Leo Choi (415) 263-6669
carriers, the price per bit for data is lower than it is for voice, so demand for equipment that provides the ability to scale capacity and reduce the cost of carrying data is increasing. Aside from ergonomic features that enhance web browsing and use of multi-media content, smart phones and MIDs are distinguished from classic mobile phones by always-on support of enterprise email functions. Multi-media and web traffic generates a demand multiple for network capacity that correlates with broader trends in rich content access over the Internet. Always-on means these products deliver content that is pushed by the network in addition to being pulled (or polled) by the consumer. This burdens operators with call events than can be orders of magnitude greater than data service associated with mobile phones. The combination of these factors has created opportunity for Starent to deliver superior performance in mobility control (the ability to handle high volumes of call events) and overall throughput, as well as network management and policy enforcement. By employing a combination of high throughput deep packet inspection (DPI), traffic classification and strong mobility management Starent provides the benefit of minimizing the amount of traffic carriers are required to transport to centralized resources. This is because Starent equipment enables traffic to be handled locally. Competitive products that cannot inspect content for traffic classification require carriers to implement servers for these functions. This is inherently centralized and therefore results in more backhaul traffic. Competitive products that cannot handle sufficient call record volume must be used in greater number. Competitive products that cannot provide support for mobility control may result in operators having to backhaul traffic more deeply into the network that might otherwise be handed off locally; this also means more backhaul capacity may be required.
Matthew Robison (415) 263-6659 Leo Choi (415) 263-6669
Starent Networks, Corp. | 3
Starent Networks, Corp. (STAR)
Discounted Cash Flow Analysis
4 | Starent Networks, Corp.
9/1/2009 2.11 25% 22% 5% 3.36% 5.50% 15.0% 75.8 3 3 - 5 Year Growth Rate ==> 2009 2010 2011 61.5 76.8 95.8 2012 119.6 2013 149.4 2017 325.5 2018 395.5 6 - 10 Year Growth Rate ==> 2014 2015 2016 181.5 220.5 267.9 LT Growth ==> Perpetuity--2019 and Beyond 4,170.5 Present Value $59.4 $64.5 $70.0 $76.1 $82.6 $87.3 $92.3 $97.5 $103.1 $108.9 $999.3 $1,841.0 2.11 $24.27 9/1/2009 2.11 25% 22% 5% 3.36% 5.50% 15.0% 75.8 3 3 - 5 Year Growth Rate ==> 2010 2011 2012 76.8 95.8 119.6 2013 149.4 6 - 10 Year Growth Rate ==> 2014 2015 2016 181.5 220.5 267.9 2017 325.5 2018 395.5 LT Growth ==> Perpetuity--2019 and Beyond 4,170.5 Present Value $74.1 $80.5 $87.4 $95.0 $100.4 $106.1 $112.1 $118.5 $125.2 $1,148.8 $2,048.1 2.11 $27.00
Beta 3 - 5 year growth rate 6 - 10 year growth rate Long-term growth rate (uniform for all tech. stocks) "Risk free" rate (10 year U.S. treasury bond) Market equity risk premium Beta-derived required return on equity Shares outstanding (millions) Most recent quarter (December fiscal year)
Net Income, perpetuity equivalent to cash flow --- >>>
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Perpetuity--2019 and Beyond
Period 0 1 2 3 4 5 6 7 8 9 10
EXHIBIT 1: STAR NET PRESENT VALUE CALCULATION
Total (millions):
NPV per share
Starent Networks FTM Valuation
Beta 3 - 5 year growth rate 6 - 10 year growth rate Long-term growth rate (uniform for all tech. stocks) "Risk free" rate (10 year U.S. treasury bond) Market equity risk premium Beta-derived required return on equity Shares outstanding (millions) Most recent quarter (December fiscal year)
Net Income, perpetuity equivalent to cash flow --- >>>
2010 2011 2012 2013 2014 2015 2016 2017 2018 Perpetuity--2019 and Beyond
Period 0 1 2 3 4 5 6 7 8 9
Total (millions):
NPV per share
Matthew Robison (415) 263-6659 Leo Choi (415) 263-6669
Source: Wedbush Morgan research
EXHIBIT 2: COMPARATIVE VALUATION AGAINST NETWORK INFRASTRUCTURE PEERS
Starent Networks, Corp. (STAR)
(in millions, except per share data)
Network Infrastructure Cisco Systems LM Ericsson Telephone F5 Networks Juniper Networks, inc. QUALCOMM
Symbol CSCO ERIC FFIV JNPR QCOM
Rating N O N NR NR
Close 9/1/2009 $21.17 $9.42 $33.95 $22.69 $45.35
Diluted Shares Out.
Market Cap.
Debt
Net cash & Last Qtr. Enterprise Cash & investments Enterprise Annualized Value / LQA investments per share Value Revenue Revenue $35,001.0 9,877.1 540.7 2,443.3 $15,681.0 $4.25 $0.90 $6.79 $4.59 $9.36 98,355 27,327.3 2,162.2 9,647 60,280 34,140 27,278 632.9 3,145.5 11,012.0 2.9 1.0 3.4 3.1 5.5 3.2 3.5
5,813.0 $123,061.2 $10,295.0 3,207 $30,209.9 6,994.5 79.6 $2,702.8 0.0 532.9 $12,090.4 0.0 1,675.0 $75,961.3 $0.0
Ericsson cash and investments adjusted to reflect investment in ST-Ericsson jv and anticipated sale of TEMS
Peer Average ------->> $0.0 $390.7 $5.15 $1,097.3 $313.3
Starent Networks
STAR
O
$19.62
75.8
$1,488.0
STAR Implied Value at Average Peer Multiple
Source: Company data and Wedbush Morgan research
$18.24
$1,383.2
$992.5
3.2
Note: O = Outperform, N = Neutral, U = Underperform, NR = Not Rated at Wedbush Morgan
EXHIBIT 3: BALANCE SHEET
Starent Networks, Corp. (STAR) Balance Sheet
FY Ended Dec ($000s) Dec-05 Current Assets Cash and cash equivalents Short-term investments Accounts receivable Inventories, net Deferred tax assets Prepaids and other current assets Total Current Assets Property and equipment, net Deferred tax assets Other assets Restricted cash Total Assets Current Liabilities Accounts payable Accrued expenses Income taxes payable Current portion of deferred revenue Current portion of long-term debt Total Current Liabilities Deferred revenue, net of current Refundable purchase price of restricted common stock & other long term liabilities Total Liabilities Redeemable convertible preferred stock Common stock Additional paid-in capital Accumulated other comprehensive income Accumulated deficit Total Stockholders' Equity
Source: Company reports
Dec-06
Mar-07
IPO 6/6 Follow-on 11/1 Jun-07 Sep-07 Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
$20,036 17,453 17,630 21,640 839 $77,598 4,936 656 1,163 $84,353
$24,010 36,144 13,619 15,121 3,193 $92,087 10,296 845 1,039 $104,267
$25,193 $136,400 25,049 20,765 16,008 16,694 16,119 16,853 3,398 4,119 $85,767 $194,831 12,568 846 1,086 18,201 1,085 592
$135,942 $223,987 14,656 9,612 34,859 56,363 23,088 29,638 5,727 6,656 $214,272 $326,256 19,792 1,154 594 20,452 1,955 716
$282,956 $321,147 $356,387 $369,351 2,510 82,263 39,304 56,183 53,689 33,428 41,519 42,527 48,734 2,463 3,449 5,923 6,291 4,932 4,709 $407,080 $408,261 $462,492 $479,932 24,741 2,059 760 26,620 2,035 832 29,158 6,274 2,031 738 29,632 9,699 8,011 943
$387,204 58,712 48,696 8,729 4,583 $507,924 32,040 11,350 8,061 810 $560,185
$389,913 54,910 50,446 9,173 7,574 $512,016 36,258 13,287 8,975 822 $571,358
$100,267 $214,709
$235,812 $349,379
$434,640 $437,748 $500,693 $528,217
$2,458 10,400 513 22,886 33 $36,290 $28,945 38 $65,273 122,282 7 (23) (103,186) ($103,202)
$4,249 10,652 232 57,106 $72,239 $6,562 707 $79,508 130,270 7 (1) (105,517) ($105,511)
$6,558 9,637 365 48,476 $65,036 $5,003 1,049 $71,088 132,267 9 120 (5) (103,212)
$8,053 11,672 552 35,113 $55,390 $5,829 1,046 $62,265 64 252,220 (9) (99,831)
$9,668 16,932 536 43,466 $70,602 $6,303 1,042 $77,947 64 256,014 (5) (98,208)
$7,448 21,731 1,075 52,733 $82,987 $10,670 783 $94,440 68 348,917 2 (94,048)
$7,326 18,282 940 128,635 -
$9,800 19,222 1,545 109,874 -
$9,752 22,093 2,844 143,333 -
$9,042 23,359 1,945 141,726 -
$4,264 20,581 15,420 151,734 $191,999 $9,153 2,878 $204,030 70 376,831 (20,746) $356,155
$9,361 20,131 10,922 139,604 $180,018 $6,995 2,842 $189,855 71 387,002 (5,570) $381,503
$155,183 $140,441 $178,022 $176,072 $9,573 713 $8,056 645 $6,973 2,515 $10,959 2,985
$165,469 $149,142 $187,510 $190,016 69 353,491 5 (84,394) 70 359,155 (70,619) 70 364,144 (51,031) 70 371,655 (33,524)
($103,088) $152,444
$157,865 $254,939
$269,171 $288,606 $313,183 $338,201
Matthew Robison (415) 263-6659 Leo Choi (415) 263-6669
Starent Networks, Corp. | 5
EXHIBIT 4: INCOME STATEMENT MODEL
Starent Networks, Corp. (STAR)
Income Statement ($000s, except per share) Product Revenue % of total Services Revenue % of total Total Revenue Y-Y Change Seq. Change Cost of Product Revenue (adjusted) % of product sales Cost of Services Revenue (adj.) % of services sales Cost of Revenue (adj.) % of Rev. Adjusted Gross Profit Adjusted Gross Margin FAS 123R Stock-based Expenses Gross Profit Gross Margin Operating Expenses Research and development % of Rev. Sales and Marketing % of Rev. General and administrative % of Rev. Stock Compensation Expenses GAAP Operating Expenses % of Rev. Adj. Operating Expenses (before amort., FAS 123R, and unusual items) % of Rev. GAAP Income (loss) from Operations % of Rev. Adj. Operating Income (before amort., FAS 123R, and unusual items) % of Rev. Interest & Other Income (expense), Net GAAP Income before taxes % of Rev. Adj. Income before taxes (before amort., FAS 123R, % of Rev. GAAP Income taxes (benefit) % Rate Adjusted Income taxes (benefit) % Rate Convertible preferred stock adjustment (GAAP) GAAP Net Income (loss) % Rate Adjusted Net Income (loss) % of Rev. Adjusted EPS incl. convertible notes interest exp (before amortization, FAS 123R, and unusual items) Y-Y Change GAAP Fully Accounted EPS (Includes FAS 123R beginning in FY06) Y-Y Change Weighted average basic shares outstanding Weighted average diluted shares outstanding (1) NOPAT per share (before amortization, FAS 123R, and unusual items) Valuation Ratios Operating Cash Flow Per Diluted Share Free Cash Flow Per Diluted Share Book Value Per Diluted Share (tangible) Cash Per Diluted Share Current Ratio Cash/Current Liabilities Accounts Receivable Days Sales Outstanding (DSO) Inventory Turns Days of Sales in Inventory (DSI) Accounts Payable Days Cash Conversion Days Employee headcount Annualized revenue/employee Annualized gross profit/employee Return on Sales Return on Assets Return on Equity $0.77 $0.68 $3.62 $3.85 2.6 1.8 132 1.5 54 53 133 635 $354 $275 23.2% 12.0% 19.4% $0.53 $0.46 $3.88 $4.33 2.9 2.3 58 1.2 62 69 51 676 $362 $285 29.9% 16.7% 25.4% $0.55 $0.48 $4.22 $4.81 2.6 2.0 77 1.3 59 64 71 739 $358 $282 26.5% 14.0% 22.4% $0.30 $0.21 $4.58 $5.02 2.7 2.1 68 1.2 63 54 77 774 $365 $287 30.5% 16.3% 25.5% $0.30 $0.22 $4.77 $5.20 2.6 2.0 72 1.2 61 27 106 849 $345 $279 22.0% 11.5% 18.0% $0.09 ($0.02) $5.03 $5.15 2.8 2.2 63 1.3 59 54 68 917 $342 $275 24.0% 13.1% 19.7% 33,003 22.6% 43,551 29.9% 12,095 8.3% 11,993 100,642 69.0% 88,649 60.8% 6,792 4.7% $19,566 13.4% $6,090 12,882 8.8% $25,656 17.6% 1,413 11.0% 1,413 5.5% (4,815) 6,654 4.6% 24,243 16.6% $0.37 270.9% $0.11 -114.3% 40,627 66,043 $0.46 11,039 19.6% 17,924 31.9% 4,330 7.7% 3,057 36,350 64.6% 33,293 59.2% 6,919 12.3% 10,289 18.3% 3,185 10,104 18.0% 13,474 24.0% 450 4.5% 450 3.3% 9,654 17.2% 13,024 23.2% $0.18 167.3% $0.13 3661.2% 68,769 74,274 $0.13 10,697 17.5% 14,807 24.2% 4,963 8.1% 4,137 34,604 56.6% 30,467 49.8% 12,156 18.4% 16,437 24.9% 5,014 7.6% 4,166 37,773 57.2% 11,566 16.4% 17,406 24.6% 4,533 6.4% 3,675 37,180 52.6% 33,505 47.4% 17,971 25.4% 22,016 31.2% 1,091 19,062 27.0% 23,107 32.7% 1,555 8.2% 1,555 6.7% 17,507 24.8% 21,552 30.5% $0.29 155.3% $0.24 319.5% 69,837 73,814 $0.28 45,458 17.9% 66,574 26.2% 18,840 7.4% 15,035 145,907 57.4% 130,872 51.5% 52,181 20.5% $68,656 27.0% $6,769 58,950 23.2% $75,425 29.7% (1,575) -2.7% 5,047 6.7% 60,525 23.8% 70,378 27.7% $0.95 158.5% $0.82 640.2% 69,265 74,172 $0.92 12,637 17.3% 15,223 20.8% 5,686 7.8% 3,644 37,190 50.8% 33,546 45.8% 21,697 29.6% 25,689 35.1% (520) 21,177 28.9% 25,169 34.4% 8,399 39.7% 9,099 36.2% 12,778 17.5% 16,070 22.0% $0.22 22.9% $0.17 31.8% 70,090 74,592 $0.22 14,562 18.6% 15,114 19.3% 5,330 6.8% 5,098 40,104 51.2% 35,006 44.7% 22,366 28.6% 28,009 35.8% 2,012 24,378 31.1% 30,021 38.3% 9,202 37.7% 11,240 37.4% 15,176 19.4% 18,781 24.0% $0.25 0.7% $0.20 8.1% 70,648 75,841 $0.23 17,300 21.4% 17,300 21.4% 6,300 7.8% 5,176 46,076 57.1% 40,900 50.7% 14,772 18.3% 20,307 25.2% 746 15,518 19.2% 21,053 26.1% 6,114 39.4% 7,811 37.1% 9,404 11.7% 13,243 16.4% $0.17 -27.1% $0.12 -53.7% 72,140 77,000 $0.17 18,800 21.4% 18,650 21.2% 6,800 7.7% 5,257 49,507 56.4% 44,250 50.4% 14,824 16.9% 20,445 23.3% 863 15,687 17.9% 21,308 24.3% 6,181 39.4% 7,905 37.1% 9,506 10.8% 13,403 15.3% $0.17 -41.3% $0.12 -48.7% 73,140 78,200 $0.16 63,299 19.8% 66,287 20.7% 24,116 7.5% 19,174 172,876 54.0% 153,702 48.0% 73,659 23.0% $94,450 29.5% $3,101 76,760 24.0% $97,551 30.5% 29,896 38.9% 36,055 37.0% 46,864 14.6% 61,496 19.2% $0.80 -15.2% $0.62 -24.6% 71,505 76,408 $0.78 72,384 18.0% 82,839 20.6% 28,149 7.0% 25,880 209,253 52.0% 183,373 45.6% 90,212 22.4% $117,597 29.2% $4,263 94,475 23.5% $121,860 30.3% 37,223 39.4% 45,088 37.0% 57,252 14.2% 76,772 19.1% $0.95 18.2% $0.71 15.2% 75,640 80,700 $0.92 2007A 125,251 85.9% 20,546 14.1% $145,797 54.5% Mar-08 48,887 86.9% 7,340 13.1% $56,227 103.4% 11.1% 8,735 17.9% 3,910 53.3% 12,645 22.5% 43,582 77.5% 313 43,269 77.0% Jun-08 52,160 85.3% 9,008 14.7% $61,168 98.2% 8.8% 9,116 17.5% 3,806 42.3% 12,922 21.1% 48,246 78.9% 381 47,865 78.3% Sep-08 55,450 83.9% 10,611 16.1% $66,061 80.0% 8.0% 9,775 17.6% 4,107 38.7% 13,882 21.0% 52,179 79.0% 376 51,803 78.4% Dec-08 59,784 84.7% 10,835 15.3% $70,619 39.5% 6.9% 10,907 18.2% 4,191 38.7% 15,098 21.4% 55,521 78.6% 370 55,151 78.1% 2008A 216,281 85.1% 37,794 14.9% $254,075 74.3% Mar-09 63,130 86.2% 10,071 13.8% $73,201 30.2% 3.7% 9,768 15.5% 4,546 45.1% 14,314 19.6% 59,235 80.9% 348 58,887 80.4% A Jun-09 65,829 84.1% 12,490 15.9% $78,319 28.0% 7.0% 9,843 15.0% 6,006 48.1% 15,849 20.2% 63,015 80.5% 545 62,470 79.8% E Sep-09 66,624 82.6% 14,075 17.4% $80,699 22.2% 3.0% 12,992 19.5% 6,500 46.2% 19,492 24.2% 61,207 75.8% 359 60,848 75.4% Dec-09 72,706 82.8% 15,075 17.2% $87,781 24.3% 8.8% 16,286 22.4% 6,800 45.1% 23,086 26.3% 64,695 73.7% 365 64,330 73.3% 2009E 268,289 83.8% 51,711 16.2% $320,000 25.9% 2010 327,798 81.5% 74,335 18.5% $402,133 25.7%
28,283 22.6% 9,299 45.3% 37,582 25.8% $108,215 74.2% 781 107,434 73.7%
38,533 17.8% 16,014 42.4% 54,547 21.5% $199,528 78.5% 1,440 198,088 78.0%
48,889 18.2% 23,852 46.1% 72,741 22.7% $248,152 77.5% 1,617 $246,536 77.0%
73,263 22.4% 27,900 37.5% 101,163 25.2% $300,970 74.8% 1,505 $299,465 74.5%
33,607 50.9% 10000.0% 13,261 14,030 21.7% 21.2% 18,572 28.1% 632 14,662 22.2% 19,204 29.1% (4,926) -33.6% 1,696 8.8% 19,588 29.7% 17,508 26.5% $0.24 209.5% $0.26 1049.9% 69,683 74,192 $0.23
17,779 29.1% 1,861 15,122 24.7% 19,640 32.1% 1,346 8.9% 1,346 6.9% 13,776 22.5% 18,294 29.9% $0.25 130.0% $0.19 577.7% 68,769 74,407 $0.22
(1) Includes common shares from the conversion of convertible preferred shares prior to company's initial public offering on June 6, 2007 as if shares were converted, as well as common stock equivalents related to outstanding stock options determined under the treasury method. (2) ROIC & adjusted ROE are calculated from adjusted/pro-forma results (NOPAT) and do not include cash and non-operating investments above $20 million or 5% of total Source: Company reports and Wedbush Morgan estimates
6 | Starent Networks, Corp.
Matthew Robison (415) 263-6659 Leo Choi (415) 263-6669
COVERED PUBLIC COMPANIES MENTIONED IN THIS REPORT (CLOSE 9/1/2009) Company Cisco Systems F5 Networks LM Ericsson Telephone Ticker CSCO FFIV ERIC Price $21.17 $33.95 $9.42 Rating NEUTRAL NEUTRAL OUTPERFORM Price Target $22 $38 $11.50
ANALYST CERTIFICATION I, Matthew Robison, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report. IMPORTANT DISCLOSURES
I N V E S T M E N T R AT I N G S OUTPERFORM – Expect the total return of the stock to outperform relative to the median total return of the analyst’s (or the analyst’s team) coverage universe over the next 6-12 months. NEUTRAL – Expect the total return of the stock to perform in-line with the median total return of the analyst’s (or the analyst’s team) coverage universe over the next 6-12 months. UNDERPERFORM – Expect the total return of the stock to underperform relative to the median total return of the analyst’s (or the analyst’s team) coverage universe over the next 6-12 months. The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to the other stocks in the analyst’s coverage universe (or the analyst’s team coverage).* DISTRIBUTION OF RATINGS (as of June 30, 2009) BUY – 46% (4% of this rating category were investment banking clients within the last 12 months). HOLD – 52% (3% of this rating category were investment banking clients within the last 12 months). SELL – 2% (0% of this rating category were investment banking clients within the last 12 months). The Distribution of Ratings is required by FINRA rules; however, WMS’ stock ratings of Outperform, Neutral, and Underperform most closely conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WMS’ stock ratings are on a relative basis.
Matthew Robison (415) 263-6659 Leo Choi (415) 263-6669 Starent Networks, Corp. | 7
The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The analysts receive compensation that is based upon various factors including WMS’ total revenues, a portion of which are generated by WMS’ investment banking activities. WMS makes a market in the securities mentioned herein. * WMS changed its rating system from (Strong Buy/Buy/Hold/Sell) to (Outperform/ Neutral/Underperform) on July 14, 2009. Please access the attached hyperlink for WMS’ Coverage Universe: http://www.wedbush.com/inside/CapitalMarkets/CoverageList.asp Additional information is available upon request by contacting Ellen Kang in the Research Department at (213) 688-4529, or by email to ellen.kang@wedbush.com, or the Business Conduct Department at (213) 688-8090.
OTHER DISCLOSURES
RESEARCH DEPT. * (213) 688-4505 * www.wedbush.com INSTITUTIONAL TRADING Los Angeles (213) 688-4470 / (800) 421-0178 * INSTITUTIONAL SALES Los Angeles (800) 444-8076 CORPORATE HEADQUARTERS (213) 688-8000 The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a representation by this corporation, nor is any recommendation made herein based on any privileged information. This information is not intended to be nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned herein. This firm, Wedbush Morgan Securities, its officers, employees, and members of their families, or any one or more of them, and its discretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to time, purchases or sales thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change without further notice. The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm. Additional information with respect to the information contained herein may be obtained upon request.
8 | Starent Networks, Corp.
Matthew Robison (415) 263-6659 Leo Choi (415) 263-6669
EQUITY RESEARCH DEPARTMENT
(213) 688-4529 DIRECTOR OF RESEARCH Mark D. Benson (213) 688-4435
CONSUMER PRODUCTS AND SERVICES Consumer Products Rommel T. Dionisio ………………..……… (213) 688-4418 Kurt M. Frederick, CPA …………………… (213) 688-4459 Education Ariel Sokol …………………..…………...... (212) 668-9874 Entertainment Retail Michael Pachter …………………..……..... (213) 688-4474 Edward Woo, CFA …………………….….. (213) 688-4382 Chris White…………..….…………………. (213) 688-4423 Gaming, Lodging & Leisure Rachael Rothman, CFA..….…………….… (212) 938-9940 Amanda Bryant, CFA…………………….… (212) 938-9942 Yinan Zhao………………………………..… (212) 938-9941 Restaurants Rachael Rothman, CFA…...…………….… (212) 938-9940 Michael Sang, CPA…..……………………. (212) 938-9943 Specialty Retail: Hardlines Joan L. Storms, CFA ……………………… (213) 688-4537 John Garrett…………………………...…… (213) 688-4523 Camilo Lyon …………...…………………… (212) 938-9924 Specialty Retail: Softlines Betty Chen …………………..…………...... (415) 273-7328 Connie Wong…….…………..…………..... (415) 273-7315 Specialty Retail: Sporting Goods Camilo Lyon …..………………….…..….… (212) 938-9924 ENTERTAINMENT AND MEDIA Advertising & Broadcasting James Dix, CFA………………….…..….… (213) 688-4315 Entertainment: Software Michael Pachter …………………...…….… (213) 688-4474 Edward Woo, CFA ………….…………….. (213) 688-4382 Chris White…………..….…………………. (213) 688-4423 Entertainment: Toys Chris White…………..………….…………. (213) 688-4423 Edward Woo, CFA …………………….….. (213) 688-4382 Movies & Entertainment Chris White…………..…...………..…….... (213) 688-4423 Michael Pachter….….………….…………. (213) 688-4474 Internet Advertising/Media Edward Woo, CFA…….…………….…..… (213) 688-4382 INDUSTRIAL GROWTH AND CLEAN TECHNOLOGY Industrial Growth Al Kaschalk....……..….……………………. (213) 688-4539 Solar Technology Christine Hersey....……..…...………………(213) 688-4311
EQUITY SALES Los Angeles San Francisco New York Boston (213) 688-4470 / (800) 444-8076 (415) 274-6800 (212) 668-9868 (617) 832-3700 EQUITY TRADING Los Angeles San Francisco New York Boston (213) 688-4470 / (800) 421-0178 (415) 274-6811 (212) 344-2382 / (800) 421-0178 (617) 832-3700 / (800) 421-0178
TECHNOLOGY Communications Equipment Rohit Chopra …………………...…………. (212) 668-9871 Sanjit Singh …………………...…………... (212) 938-9922 Communications Technology Matthew Robison………..……...…………. (415) 263-6659 Leo Choi ………………………………….… (415) 263-6669 Datacenter Technologies Kaushik Roy…...………………...…………. (415) 274-6873 Software: Enterprise / Application Michael B. Nemeroff.……………..………. (212) 668-9876 David Giesecke…...…..…………………... (212) 938-9925 Software: Infrastructure J. Derrick Wood, CFA…………..…………. (415) 274-6822 David Kaczorowski….……………………….(415) 274-6883 Internet: Infrastructure Kerry Rice, CPA …………………………… (213) 688-4538 Semiconductors Patrick Wang…………………………...…. (212) 938-9938 Michael Lucarelli..………………...…….…. (212) 938-9927 Betsy Van Hees………………………….... (415) 274-6869 Telecommunications Software Scott P. Sutherland, CFA ……………..…. (213) 688-4522 Suhail Chandy …………………...……..…. (213) 688-4380 Transaction Processors Gil B. Luria....….…..………....……………. (213) 688-4501 Nick Setyan……....……..…………………. (213) 688-4519 Wireless Equipment Scott P. Sutherland, CFA ………….…….. (213) 688-4522 Suhail Chandy ……………...……….…….. (213) 688-4380 LIFE SCIENCES Biotechnology / Biopharmaceuticals Gregory R. Wade, Ph.D.………...……….. (415) 274-6863 Jeremiah Shepard, Ph.D.………...……….. (415) 274-6862 Kimberly Lee, D.O….……………..………. (415) 274-6842 Cardiovascular, Devices & Regenerative Duane Nash, MD JD MBA…...…..………. (415) 263-6650 Emerging Pharmaceuticals Liana Moussatos, Ph.D.….........…………. (415) 263-6626 Richard Lau ..…………….………..………. (415) 274-6851 Life Sciences Tools & Diagnostics Un K. Kwon-Casado, M.SC...…....………. (415) 263-6634 Specialty Pharmaceuticals Patricia Bank …………………...…………. (415) 263-6646
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