Will Acme Packet Remain a Dud?

05/30/2012 7:45 am EST

Focus: STOCKS

Rob DeFrancesco

Founder, Tech-Stock Prospector

You may think that this company is a 21st-century version of a Wile E. Coyote gadget to catch the Road Runner...but this firm is on its way from dog to darling again, writes Rob DeFrancesco of Tech-Stock Prospector.

I approached the first-quarter earnings report from Acme Packet (APKT) with much trepidation. After two poor quarters in a row, I knew the institutional crowd was prepared to take this stock down hard on another miss.

With the shares already off more than 60% from the 52-week high, Acme Packet is like a faded Hollywood starlet trying to regain her fame. But just one really strong quarter from this former high flyer, and the fast-money crowd will come running back.

As it turned out, there were no negative or positive surprises in the March quarter. The key metrics came in at plan and Wall Street showed general acceptance of the numbers. Per-share earnings of 17 cents matched the consensus estimate, and revenue of $70.8 million was slightly above the consensus of $69.3 million. Gross margin stayed flat sequentially at 83%.

The company added 70 new customers (bringing its total count to 1,688), including 46 enterprise accounts and 24 service-provider accounts.

On the earnings conference call, management reaffirmed its conservative 2012 revenue growth guidance of 10%. While that growth rate is nothing to write home about, the fact that guidance was maintained was good enough, at least for now. CEO Andy Ory said Acme Packet should see sequential revenue growth in each of the next three quarters.

Acme Packet is still on its feet. However, the company is not out of the woods, as management is modeling that revenue in the second half of the year will account for 58% of total revenue, up from an average of 54% over the past five years. That sets a high bar for the third and fourth quarters.

For sure, there were plenty of analyst questions on the earnings call concerning this expected sharp revenue ramp in the back half. What gives management the conviction that things will really begin to turn up after June?

It always concerns me when management teams predict back end-loaded years. The risk of whiffing the numbers is just so high because a lot can happen in a technology segment over the course of several months. And in Acme Packet’s case, bookings have not yet shown any real improvement, particularly on the important carrier side of the business, which accounts for 79% of total revenue.

Ory did say the “funnel” on the enterprise side was very strong, even calling it “the largest enterprise funnel in North America that we have ever seen.” In this case, the funnel is customer interest in the form of inquiries or price quotes. The funnel indicates intent, but that’s very different from actual orders in hand.

For 2012, the company’s enterprise business (21% of total revenue) is expected to help carry the show. Acme Packet, which has the leading market share (34%) in enterprise SBCs, now counts nearly 600 enterprise customers, and looks for this segment to put up 2012 revenue growth of at least 40% because of strong demand for SIP trunking, which saves businesses a lot of money by routing voice calls over the Internet.

Indeed, it was a good sign that Verizon Business (VZ) was back as a 10%+ customer in Q1, representing 16% of total revenue.

On the call, Ory predicted that Acme Packet’s enterprise unit could represent half of total revenue in three years thanks to the massive growth cycle taking place. However, the company must deal with the current reality that its core service-provider business, particularly in North America, remains stagnant.

Carrier spending really fell off the cliff in the second half of 2011 and there are currently no strong signals that the environment has changed for the better, meaning the Q2 earnings report will be yet another high-risk event.

Looking ahead, Acme Packet sees solid growth potential from Voice-over-LTE (VoLTE), and is involved in what it terms 27 carrier “opportunities” (up from 25 in Q4), including ten confirmed architectural wins. Later this year, MetroPCS will be the first Acme Packet customer to go live with VoLTE.

There is no question that VoLTE represents a huge potential market—there are 5 billion TDM endpoints that could be transitioned to the new technology. The problem is timing, because this is mainly a 2013 and 2014 revenue event. For now, Acme Packet shares remain a high risk-high reward situation.

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