Sunday, February 17, 2013

What's All The Ruckus About Ruckus Wireless?

Ruckus Wireless (RKUS) went public at $15/share on November 15th last year, only to drop 18% to $12.25 when the closing bell rang that very same day. That was then. Earlier this week, it crossed the tape at $26.50 after a dizzying ride to the upside, only to come crashing down to $19 at the market close on Friday. The equity sold off because of some cautionary comments by CEO Selina Lo during Tuesday's Q4 conference call.

There is a lot of impulse buying when IPO's hit the tape, and Ruckus Wireless is no exception. Investors get an opportunity to get in on the ground floor of a company with disruptive technology, and the stock usually runs. With the stock at $26.50, and a forward P/E Ratio of 147, Ruckus just got ahead of itself. The security is currently in correction mode.

It should be noted that in mid January, market pundit Jim Cramer showcased the company on his television program Mad Money, but cautioned that the stock was expensive at $21/share. His endorsement may have moved the equity despite his warning. A brief business description is provided by Seeking Alpha Editor Miriam Metzinger in her Mad Money recap:

Ruckus Wireless is revolutionizing wifi, and is making interference-resistant systems and antennae to ensure there is no interruption in Wi-Fi service. The company has strong exposure to the enterprise space, and allows companies to install fewer Wi-Fi points, because the signal is so effective.
Although Ruckus Wireless has more than 21,700 enterprise clients worldwide, the company is credited with developing the industry's first adaptive Wi-Fi solution for service providers. Some of their large telecom clients include Time Warner Cable (TWC), Towerstream (TWER), British Sky Broadcasting (BSYBY), Japan's KDDI, Axtel, Oi, and Global Reach. A highly diversified and global business, Ruckus operates research and development centers in Sunnyvale, California; Shenzen, China; Bangalore, India; Tel Aviv, Israel; and Taipei, Taiwan.

Because of the innovation from their R&D department in regards to the telecom carriers, Ruckus may have leapfrogged over competitors Cisco Systems (CSCO), Ericsson (ERIC), Hewlett-Packard (HP), and Aruba Networks (ARUN). These advances in technology can have a short shelf life, especially with the deep pockets of Ruckus rivals. It is no coincidence that Cisco acquired networking company Meraki two days after the Ruckus IPO.

According to a recent Forbes article by Connie Guglielmo, "Meraki caters to small and medium sized businesses looking to enhance their Wi-Fi networks. Analysts see the deal in part as a play to take some business from Ruckus and Aruba.". However, with the addressable market growing at a steady pace, their may be room for solid growth for all participating parties.

CEO Lo discusses the potential growth in the market:

Infonetics forecasts that the service provider Wi-Fi market will grow from approximately $300 million in 2011 to $2.8 billion by 2016, at a 57% CAGR. Leveraging the same technology advantages, we’re also a leading player, and continue to gain share in, the enterprise Wi-Fi market, which is expected to grow from $3.5 billion in 2011 to almost $7 billion by 2016, according to Gartner.
The business breakdown in 2012 for Ruckus was a split of a third going to the carriers, and two-thirds to enterprise. They would not extrapolate that dynamic for the current year.

CEO Lo continues about the Ruckus advantage in the high growth telecom sector:

Service providers choose Ruckus because our innovative smart Wi-Fi technology is uniquely designed to address three critical challenges they face. First, interference caused by the proliferation of Wi-Fi networks in and around public venues. Second, scalability at an order of magnitude beyond the design points of conventional enterprise-class Wi-Fi solutions. And third, seamless integration of Wi-Fi into the operator’s existing back-end systems, in particular the mobile core for 3G and 4G networks.
Besides an astronomical P/E Ratio, two other reasons Ruckus may continue to fall comes from CFO Seamus Hennessy. The first piece of information was presented in the prepared remarks of the conference call:
We expect our operating profit to be slightly impacted over the coming quarters as we continue to invest in research and development, plus sales and marketing to capture sizable market opportunities ahead of us. However, we expect our strategic investments to result in attractive, profitable top line growth in the future.
In addition, in the Q&A session of the presentation, Mr. Hennessy stated that Q1 would be weak because of seasonality, and that Q2 and Q3, are the strongest quarters for the company. We are in the midst of Q1 now. Although the market is a forward looking mechanism, if the next earnings release disappoints (Ruckus already gave in-line guidance for Q1), Wall Street could take the company down another notch.

It is important to remember the company had a very impressive inaugural quarter, and that 2012 was equally as good. It is the valuation that crushed the stock, and that is not a Ruckus problem, it's a Wall Street issue. Here are some of the highlights from the conference call:

  • Company achieves record quarterly revenue; fourth quarter revenue grows 51% year-over-year to $62.2 million.
  • 2012 revenue grows 79% year-over-year to $214.7 million.
  • Adds over 2,900 new end-customers in the fourth quarter, reaching over 21,700 total end-customers.
  • $28.1 million of cash provided by operating activities for 2012.
Let's decipher the earnings and revenue projections as provided by Yahoo Finance. The consensus of the eight analysts that cover the company in regards to earnings per share is $.18 for 2013, and $.30 for 2014. That gives us Forward P/E ratios of 105, and 63 respectively. Way out of my wheelhouse. However, with a young growth company, sales are more important to some investors when evaluating an equity. 2013 revenues are projected to be $278 million, and for 2014, $350 million. That's growing at an impressive rate, but not with the same trajectory as in 2012. Currently, Price/Sales is 12. Very expensive.

My impression is that the underwriters got this one right when they priced the IPO in the $13-$15 range. With a market that may be getting tired, weakness in Europe, and a soft Q1 as reported by the company, Ruckus Wireless may be dropping down to more advantageous levels. On Wall Street they like to say "the trend is your friend". If last week's price/action are any indication, this stock may be going lower.