Anite Half Year Trading Update

A super half year trading update from Anite today which can be read here and there is a more detailed write up on Anite in a previous blog post here. It looks highly likely that broker forecasts will have to be upgraded and this makes Anite an even more attractive stock to buy in order to play the growth in the smart phone market.

Investors would be advised to look at the previous post whilst interpreting the update, of which will summarise below.

Anite Half Year Trading Update

This is a first half update, which for Anite, runs to October. The year end is in April. The key point to note (re earlier post) is that Anite is typically a H2 weighted business. Handset revenues are the strongest growth driver at the moment, so the focus will be on this division.  Note that overall revenues declined from H2 to H1 (2010) last year and that handset revenues were flat.

 However, in this H1 Anite are telling us that revenues are up 60% from the same period last year. This implies a sequential movement in handset revenues from H2 to H1 (2011) of £28.9m to £32.9m, when last year this movement was flat. For H2, Anite are predicting that Handset testing revenues and operating profit will be similar to the first half. This may prove a outlook which is too cautionary.

Now, appreciating that Anite benefitted from in Q1 from a large order from one specific customer, there is still reason to expect that H2 will see its usual stronger performance. In this update, Anite confirmed that Q2 order intake was ‘very healthy’ and that since the last update in September the strong trends have continued. This is in line with what everyone else is saying in the smart phone industry.

Anite Analyst Upgrades

Indeed, knocking up some back of envelope assumptions demonstrates the potential for an upside re-rating here.

• Conservatively assuming (in line with Anite)  that H2 handset sales are the same as H1 would give full year handset sales at £20.6*1.6*2=£65.94m
• Last full year sales for Network Testing and Travel were a combined £44.15m

Combining the two, gives full year revenue of £110m when current analyst forecasts are for £103.3m. And, of course, this assumes no H2 bias for handset sales. It also assumes flat full year sales for Network Testing and Travel, even though it appears that Anite are bringing forward the period when ‘material’ sales in 4G testing are due to kick in, to ‘later in the year’ from previously in 2013.

Therefore, there is reasons to believe that Anite’s full year numbers will beat even the revised forecasts that the company is conservatively guiding analysts towards. Following this update,  95p is a reasonable price target.  

Anite Offers Exposure to Smart Phone Growth



A Smart Phone Stock to Buy



Anite is an interesting stock with which to play the growth in smart phones and next generation 4G LTE technologies. The stock is well placed for growth and is a very good candidate for investors looking to buy stocks for a GARP based portfolio.  Anite has two divisions, namely wireless testing and travel. The latter is an odd fit and will be discussed later, because the real excitement is with the wireless division.

A quick break down of historical six months revenue and adjusted segmental profits reveals the transformation in the business over the last couple of years. Firstly, starting with revenues…

Revenue	Oct 09	Apr 10	Oct 10	Apr 11
Handset	15,226	20,527	20,606	28,937
Network	8,634	11,392	11,965	12,183
Travel	11,335	11,656	9,728	10,275
Total	35,195	43,575	42,299	51,395

…and then a breakdown of segmental adjusted operating profits…

Adj Op Profits	Oct 09	Apr 10	Oct 10	Apr 11
Handset	375	3,085	3,537	6,466
Network	1,517	3,052	3,610	2,810
Travel	2,512	3,063	1,548	2,658
Total	4,404	9,200	8,695	11,934

…and the shift towards profit growth coming from higher margin handset sales is clear to see.

Unlike UK listed Spirent SPT or US listed Ixia $XXIA, Anite provides software whilst the previous companies primarily provide hardware. This means that Anite has more operational leverage and the expansion in margins has indeed been impressive.

A Smart Phone Growth Stock

The handset division is seeing increasing growth from testing in next generation LTE smart phones and in September’s update Anite confirmed that LTE handsets made up 46% of total handset testing revenues, as opposed to 17% for the same period last year.  Qualcomm $QCOM gave results recently and whilst most of the attention was focused on the strong growth of 3G in emerging markets, Qualcomm was very optimistic on LTE as well…

‘And what we're seeing in terms of forward-looking mix is, I would say, tremendous growth in the mass-market smart phones around the world. You're seeing a lot of designing activity in those mass-market areas. We're also starting to see, I think, more penetration of LTE and the leading AP processor coming together.’

…and this market looks set to grow. The early cycle semiconductor companies like Aixtron, Samsung and Intel all affirmed that the strongest growth area for their businesses is in smart phone chip demand.

Moreover, turning to Anite’s Network Testing division, there is a similar trend developing. There is reason to believe that Anite are guiding towards an acceleration in demand here and its not clear if this is baked into analyst forecasts yet. For example, back at the full year results in June, Anite said…

‘Business activity levels in the second half of the year were at more normal levels.  The second half of the year also saw the first minor sales of LTE products in network testing, although levels are not expected to become material until 2013. ‘

…but at the September trading update, Anite implied that ‘material’ sales would now be in the year to April 2012…

‘The Network Testing business performed in line with expectations in the quarter.  The first sales of the Invex 4G benchmarking product were made in the period, although material sales are not expected until later in the year following planned investment in the first half to support the product development.’

So, the handset division is trading ‘significantly in excess; of last year and ahead of expectations and network testing sales appear set for early acceleration. Meanwhile, the Travel division appears to have stabilized with revenues focused on servicing a large client in TUI.

Anite Evaluation

With a stock price of 66.5p Anite trades on a market cap of £198m and has net cash of £9.1m on the balance sheet. Analyst forecasts are for adjusted EPS of 4.5p and 5.4 for 2011-12 respectively.  This would put Anite on a forward PE ratio of 14.7x and 12.3x respectively. This is hardly expensive when you consider that Anite is primarily a software company so much of that profit will be translated into free cash flow.

Indeed, Anite are expected to generate £4.2m and £7.8m in FCF for the next two years and, with mid teen’s earnings growth looking set for the next few years, the stock is undervalued. An evaluation closer to 90p is possibly better value.

In addition, UK peer Spirent has $227m in cash on its balance sheet and is looking to make acquisitions. Anite would be a very good fit. Watch this space.

Weakness in China Telecom Spending?

In the light of the recent profit warning from Ixxia $XXIA I decided to take a closer look at what other players in the industry such as $ARX Aeroflex, Spirent and Anite are saying. In summary, there does appear to be some weakness in emerging market network infrastructural spending. However, this may prove temporary and, merely a consequence of some caution from OEM manufacturers in the light of macroeconomic concerns relating to Japan and Euro zone sovereign debt fears.  In addition, handset and wireless appear to be growing well, so a pick up later in the year is possible.

As a note of caution I have sold off my Spirent position but retain Agilent $A as the co is more focussed on wireless solutions and the division does not make up more than 17% of revenues. The next company to issue a statement is likely to be Spirent in the UK when it gives half year results on the 4^th of August.

Company	Date	What they said	Global Markets?
Spirent	4th May	‘Trading performance for the period is in line with the Board's expectations and continues the positive trend that Spirent reported in its full year 2010 results’.	‘We expect to maintain progress throughout the remainder of 2011’
Finisar	15th June	‘Despite the decline in revenues compared to the prior quarter, we were able to achieve non-GAAP gross margin of 34.2%, exceeding our prior guidance of 32% to 33%’	‘The sequential decline in revenues was primarily driven by soft demand from our telecom customers, particularly Chinese OEMs’
Anite	29th June	‘Network Testing's prospects have been enhanced by the Invex acquisition and its growing global presence. Its broad suite of products means that it is well set to continue to grow, albeit in the first half it is unlikely to exceed the very strong comparative period last year.’	‘While Network Testing's revenue in EMEA increased by 33%, to £12.2m, and in the Americas by 44%, to £5.6m, in Asia it declined by 9%, to £6.3m.’
Aeroflex	7th July	‘Delays in shipment approvals from and orders of test equipment by U.S. government entities have caused Aeroflex to reduce its estimated ranges of net sales and Adjusted EBITDA to $198 million to $200 million and $56 million to $59 million, respectively’	‘we had some major achievements this quarter, including record sales of wireless test equipment, our first significant order from a major global manufacturer of wireless infrastructure equipment for next generation LTE(A) TM500 products’
Ixxia	7th July	‘Total revenue for the second quarter of 2011 is expected to be in the range of $67.0 million to $69.0 million, below the company's previous guidance of $78.0 million to $82.0 million.’	‘Second quarter 2011 revenue was impacted by several factors, including lower than expected revenue from Asia Pacific and from certain large equipment makers, as well as orders received late in the quarter that could not be fulfilled in the second quarter’

Network Testing Heading for a Weak Quarter?

I think that it is not unreasonable to expect Spirent to report some softness in this quarter, although it is not clear whether this is the start of at trend or a temporary pause. No matter, I have sold my position and will await their update. Ixxia have confirmed what Finisar said last month so it does appear that Chinese OEM’s have held back on spending.

 I suspect this is a consequence of a reaction to the events in Japan or alternatively part of the same forces that are holding back China LED street lighting expenditure. The latter is a subject well covered on this blog. It will be interesting to see how these pans out with Spirent’s next statement. In view of the sustained weakness in China LED street lighting I have decided to be cautious here.

Anite Signals Strong Growth for 4G and LTE Spending

Ixia $XXIA and Spirent $SPT investors got an early read across from wireless and handset testing company Anite $AIE. Anite’s gave a final results statement and gave the stock market an update on how 4G and LTE deployment is taking place.  In summary on their wireless division,

‘2011 saw improved financial performance within the Wireless division, driven by both customer spending recovery and organic business growth. We believe the recovery phase is complete and that its 2012 results will be driven by business growth alone. Wireless is better positioned to take advantage of its existing and new markets than in the past and we believe that the LTE opportunity is also likely to be deeper and longer lasting than previous technologies.’

In addition, Anite talked of increased investment in 2G and 3G products as well as LTE. This augers well for the likes of Alcatel, Spirent and Ixia.

However, the key to longer term growth is the demand pull from the use of smart phones with data demanding functionality. This is particularly relevant when IP and video data is increasingly being used because it is bandwidth intensive. Naturally, this puts pressure on the network operators and handset manufacturers and testing solution providers will benefit if their customers are under pressure to invest in new technologies.

Interestingly, Anite mentioned that the demand for legacy systems has..

‘proved more sustained than expected and we continue to invest in this area.  However our main focus is currently on LTE, although the pace of change is accelerating and we are already planning for the next generation.’

Growth in the Wireless Market

 Anite referred to the longer term demand drivers here

‘Sales of smartphones are expected to grow 61% year-on-year- making the market ever more complex. While there is little growth in voice and text in developed markets, mobile data traffic is expected to grow by 6.3 exabytes (1 billion gigabytes) a month by 2015, a 25-fold increase over 2010^’

Industry Handset Production Forecast (m)	2010	2015
2G GSM	700	300
3G (WCDMA)	400	950
LTE	0	75

LTE is being deployed quicker than 3G ever was, simply because the adoption of smart phones is driving the need for a network upgrade. This is distinct from the early 2000’s when 3G was rolled out before the handset technology existed to take advantage of the network. It really is different this time.

In general, this is a very positive update and augers well for Ixia, Spirent and Alcatel. There doesn’t appear to be any slowdown in network upgrades and legacy system sales are holding up well.