Ixia $XXIA and Spirent Communications represent two great ways to play the roll out of next generation wireless technologies. These companies primary activity is to stress test the load bearing capacity of telecommunications network equipment manufacturers and large service providers. In particular, both stocks are exposed to the upgrade cycle in 4G ad LTE spending, which should see them expanding margins and cash flow as their customers appear to be in the early stages of a sustained capital expenditure cycle. They are two great stocks to play the growth in internet and broadband expansion.
Growth Drivers
The argument here is relatively simple. From the consumer side, there is an explosion in bandwidth demand which is being driven by social applications (facebook, twitter etc) and a concomitant technological revolution in smart phones and internet based devices. On the business side, there is a huge increase in demand for ‘anytime, anywhere’ internet access utilising increasing usage of data.
Furthermore, the service providers are moving beyond purely providing bandwidth, by increasingly selling cloud services and helping large enterprises to outsource their IT. All of which, is placing increasing demands on Spirent & Ixia end customers and, it is inevitable that an upgrade cycle will follow.
In addition, as internet traffic grows more complex there is an increasing demand for large enterprises (financials etc) to invest in stress testing equipment. Financials are seen as a key growth market because their end demand is mission critical and quite frequently involves dealing with unusual patterns in network usage.
Ixia and Spirent Solutions
These companies are strong rivals and compete in many of the same markets. Whilst wireless attracts most attention due to its growth, it should be emphasised that this produces a backload which is then dealt with by wire line. In other words, both these markets will see sustained growth.
A quick look at the geographic mix of revenues reveals a marked similarity.
| Geographic Share | Spirent | Ixia |
| US | 52% | 51% |
| Emea | 16% | 15% |
| APAC/RoW | 32% | 34% |
Both companies offer convergence performance testing and are seeing strong growth in Ethernet based infrastructure. In particular, the move towards 10GbE infrastructure should see continued demand growth. Within 3G/4G there is a strong trend (particularly in emerging markets) towards a deployment roll out as data centers and service providers.
Spirent provides ‘TestCenter’, which is its main network testing platform which assesses the vulnerability of traffic application load. Capacity and performance are tested via ‘Avalanche’ which operates on the ‘TestCenter’ platform
By way of comparison, Ixia offers IxLoad which tests converged services and application delivery platforms. IxLoad has been enhanced via the incorporation of IxDefend which was previously a separate vulnerability assessment solution.
Ixia does have Cisco as a major client and this could cause concern as Cisco have been disappointing the market recently. However, strong growth elsewhere has seen Cisco sales fall to less than 10% of Ixia’s revenues.
Spirent or Ixia?
Essentially, both look set for strong growth. Spirent has lower gross margins because it offers service assurance and has a oddly fitting division (Systems) which manufactures electronic control systems for electrically powered systems. This division is lower margin but nevertheless contributes 12.3% of revenues and 7.8% of operating revenues to Spirent.
Spirent looks to be cheaper on current evaluations..
| Evaluation ($m) | Spirent | Ixia |
| Market Cap | 1561 | 1120 |
| EV | 1338 | 1100 |
| Gross Margin | 66.60% | 78% |
| EV/Rev | 2.8 | 4 |
| FCF/EV | 6.20% | 3.23% |
| Current P/E | 19.8 | 34.1 |
...but Ixia has the edge on growth prospects
| Analyst Forecasts | Spirent | Ixia |
| Forecast Rev Growth | 9% , 6.7% | 20.5% , 16% |
| Forecast EPS growth | 10.7% , 9.4% | 36.7% , 29.8% |
| P/E 1 year | 18 | 30 |
| P/E 2 year | 16.5 | 19.2 |
| Price/Rev 1 year | 2.5 | 3.4 |
| Price/Rev 2 year | 2.4 | 2.9 |
It looks, assuming current pricing, like it will take Ixia a couple of years to reach the levels of cash flow yield that Spirent is at now. Moreover, Spirent has $223m in cash and could possibly sell the 'Systems' division, so the possibility exists for EPS enhancement. Indeed, the company recently made some share buy backs with its cash and this can be expected to continue.
Spirent was added to the portfolio.
