William Blair Initiates 'Highly Profitable' Casa Systems With Outperform

The quiet period for Casa Systems Inc (NASDAQ: CASA), a provider of software-centric broadband products, expired Tuesday following the company's Dec. 14 IPO.

The Analyst

William Blair analyst Jason Ader initiated coverage of Casa Systems with an Outperform. 

The Thesis

Casa Systems is leveraging its strong position in the $2.3-billion Converged Cable Access Platform/Cable Modem Termination System market into adjacent areas of network transformation, analyst Ader said in a Tuesday note. (See the analyst's track record here.) 

Casa's new areas of focus include remote PHY cable nodes and mobility software. These sectors more than triple the company's total addressable market, keeping it on track for an acceleration in revenue growth over the next two years, Ader said.

"We expect new products to drive five and 10 points of incremental revenue growth in 2018 and 2019, respectively," the analyst said. 

Broadband appetite and network transitions will drive acceleration in the company's business, according to William Blair. The firm sees DOCSIS 3.1 for cable; fully digital distributed access architectures for cable using R-PHY nodes; virtual CCAP for cable, fixed mobile convergence; and other business areas as key catalysts.

Casa's software-centric architecture creates a competitive moat, Ader said. Standalone software sales have been on the rise, rising from 7 percent of sales in 2015 to about 27 percent in 2017, he said. 

William Blair expects this trend to continue, as Axyom, the company's multi-service broadband software platform, is adopted.

Casa has a "highly profitable" business model, with a strong profit record and industry-leading gross margins, non-GAAP operating margins and adjusted EBITDA margins, the analyst said. Margins are expected to remain roughly stable, as the share of software mix continues to increase, partly offset by sales of hardware nodes and increased investments in new markets.

With the valuation remaining well below the peer group median multiples, William Blair sees a compelling risk-reward profile for the shares, especially as the company enters new markets and produces above-industry profits.

The Price Action

Since its listing Dec. 15, shares of Casa Systems have appreciated about 47 percent from the $13 offer price. 

Casa was down 2.41 percent at $18.66 at the time of publication Tuesday morning. 

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