ADVA Optical Networking: Enhancements, Partnerships Expand Footprint

New products, software enhancements and its Juniper partnership are helping ADVA (ADV.DE) expand its footprint and grow market share without sacrificing margins. Management is striving for above-consensus double-digit revenue growth and would look to M&A to drive share. Q3 targets were reiterated.


Strengthening its position in tough markets
ADVA’s positioning as an innovator is serving it well in otherwise difficult market conditions. It is helping it access new verticals (eg internet exchanges with the 100G Metro solution) and is supporting sales efforts in the difficult enterprise market (fibre line encryption technology is being taken up by 80% of customers). The Juniper relationship is developing well and ADVA is gaining considerable profile in tier 1 and 2 accounts. With the scheduled launch of the Juniper co-developed integrated PTX router platform in 2013, management believes the US could represent 50% of sales by 2015 (2011: 30%). It should also help its efforts in Asia where a long-haul solution is more relevant than the Metro product. Management is striving for double-digit growth and would look selectively to acquisitions to support market-share gain.

Profitable growth: Driving margins
The mantra of the investor day was ‘profitable growth’. Gross margin was up 3pp at the half year and, given the processes put in place over the last few years, this appears sustainable. Further operational efficiency gains are targeted and together with a higher proportion of revenues coming from software (targeting 20% by 2015),
management believes this can improve a further 3pp in the medium term. Senior management remuneration is heavily geared to EBIT growth and triggered at levels considerably higher than current consensus.

Valuation: Little growth discounted
With the Juniper collaboration, its own product and software initiatives and the underlying growth drivers coming from cloud computing and mobile backhaul ADVA’s medium-term positioning looks promising. Near term, the reiteration of Q3 guidance is reassuring in daily trading conditions described as guerrilla warfare. On an EV/Sales of 0.6x and a 2013 P/E of 11.6x, a significant valuation discount to peers remains and the shares appear to discount little growth despite operational outperformance of its peers in recent quarters (ADVA has posted revenue CAGR of 12% over the last four years). Our concerns over Nokia Siemens Networks seem not to worry management (maximum risk quantified at €3m revenues).

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