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Acme Shares Beaten After Earnings

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Despite beating analyst estimates and raising guidance in its third-quarter earnings report, shares of VOIP equipment vendor Acme Packet Inc. (Nasdaq: APKT) fell more than 15 percent today.

The company earned $5.5 million, or 8 cents a share, on sales of $29.6 million in the third quarter. That compared with earnings of $8.6 million, or 12 cents per share, on sales of $22.3 million for the year-ago period. (See Acme Packet Reports Q3.)

Excluding stock-based compensation, Acme said, net income in the quarter was $6.7 million, or 10 cents per share, compared with $7.1 million, or 13 cents per share, for the year-ago quarter.

Acme's revenues were in line with analyst estimates of $29.3 million, and the company topped Wall Street's earnings forecast of 9 cents per share, according to Thomson Financial .

However, despite beating analyst expectations and upping guidance, shares of Acme Packet stock closed Wednesday down $2.36 (17.60 percent), to $11.05 each.

So what gives?

There are a few forces at work, says Cantor Fitzgerald analyst Edward Jackson. One reason for the selloff, he says, comes from disappointment with the company's earnings guidance.

While Acme Packet revised its earnings forecast upwards, it only brought guidance in line with Wall Street expectations. The company expects earnings, excluding one-time items for fiscal 2007, to be 35 cents or 36 cents per share, on revenues between $112 million and $113.5 million. Meanwhile, analysts expect the company to earn 34 cents per share on sales of $113.6 million.

More importantly, Jackson says that, while the overall results were good, certain details of the company's earnings may have spooked investors.

Chief among them is the fact that North American sales were down year-over-year and sequentially, which some see as a sign that Acme Packet is losing business with key customers, in particular Sprint Corp. (NYSE: S).

On Tuesday's earnings call, officials said Acme Packet had three 10-percent customers during the quarter, but Sprint was not among them.

The makeup of its large customers also signaled a shift, with 10-percent customers -- Alcatel-Lucent (NYSE: ALU), Nokia Networks , and Ericsson AB (Nasdaq: ERIC) -- together accounting for 46 percent of all revenues.

"The company's business shifted much more to international sales and much more to third-party channels," Jackson says. "Dramatic moves like that raise concerns."

While results in the company's sales mix might have scared some investors, Acme maintains that its business is sound. The company forecasts a rebound in its North American business, which it expects will be helped by recent contract wins at Telus Corp. (NYSE: TU; Toronto: T) and Cbeyond Communications (Nasdaq: CBEY). And Acme says that it is seeing an uptick in strategic conversations with large service providers, many of which have long sales cycles. (See Acme Gets Wins.)

Despite the drop in Acme's share price today, Jackson believes the company has a strong future ahead. He reiterated a Buy rating on the stock today and raised his 12-month price target from $17 to $18.

"The fact of the matter is, these guys are a tremendous success story. They've made every quarter, and their financial performance has been solid. The issues with the stock have more to do with the Street not listening to the management team, not the management team not delivering on what they said they would."

— Ryan Lawler, Reporter, Light Reading

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