Acme's Shares Hit Reverse

Nasdaq newcomer Acme Packet Inc. (Nasdaq: APKT) found out this week just how quickly investors can do a u-turn as its stock experienced a rollercoaster ride either side of its first earnings report. (See Acme Packet Reports Q3.)



Acme completed a successful IPO in mid October, and immediately saw its stock leap more than 60 percent on its first day of trading, Friday October 13, to close at $15.91. (See IPO News: Acme Soars, Neuf Preps and Acme Profits as Newport Shrinks.)

And ahead of its earnings report, issued after the markets closed Tuesday, the share price leaped $0.99, about 5.5 percent, to close at $18.94.

Then came the third-quarter results. Revenues of $22.3 million were the company's highest ever for a quarter, and 229 percent better than a year earlier. It was also a healthy step up, nearly 14 percent, from the $19.2 million generated in the second quarter.

Third quarter net income was $6.8 million (just over 30 percent of sales), for earnings of 12 cents per share, compared with a loss of $2.5 million a year earlier.

However, the company's forecasts for the final quarter of 2006 and for 2007 took the shine off its story. Fourth-quarter revenues are expected to be flat, at between $22 million and $23 million, while net income is set to drop to between $4.7 million and $5.2 million, or between $0.08 and $0.09 per share.

That would put revenues for the full year 2006 at around $83 million, and net income at around $23 million.

And in the company's conference call, CFO Keith Seidman said Acme is expecting 2007's revenues to range between $108 million and $112 million, while net income is expected to be between $16.5 million and $17.5 million, some way off the expected 2006 profit.

That outlook destroyed the week's gains and sent the stock into freefall this morning, sending it down $3.81, just over 20 percent, to $15.13.

Why are profit margins set to tumble? Largely due to the cost of being a public company. Acme was still a private company during its third quarter, but now has to bear the various listing, reporting, and insurance costs that come with being a listed firm.

It's hardly a doom-and-gloom scenario, though. Acme has a very firm grip on the session border controller sector and is set to deliver consistent profits, albeit not at the same level as during the first nine months of this year. Gross margins were 80 percent, and the vendor's long-term target is between 72 percent and 74 percent.

It added 50 new customers in the third quarter to take its customer count to 325, including 100 Tier 1 carriers. And, according to research house Infonetics Research Inc. , Acme had a 48 percent share of the session controller market in the second half of this year.

Infonetics predicts that the session controller market will grow from $86 million in 2005 to $613 million in 2009.

In the third quarter, Acme had three customers contributing more than 10 percent of revenues -- Sprint Corp. (NYSE: S), which is still in the process of building out its IP peering infrastructure, and two resellers, Lucent Technologies Inc. (NYSE: LU) and Siemens Communications Group .

CEO Andy Ory noted that while customer acceptance is an arduous process, it's worth the wait. The testing, acceptance, and deployment cycle is very long, mostly a few years, he noted. "We were working with BT Group plc (NYSE: BT; London: BTA) for three years before it became a customer. It takes a long time to become operational, but that creates a high barrier to entry [for competitors] and creates a lot of customer stickiness," stated Ory.

The CEO added that Acme is now starting to see serious demand from wireless operators of all types -- mobile, WiFi, and WiMax -- and that the cable market, where Acme already has seven of the top 10 North American players as customers, is still fertile ground for new business. "We are winning a good deal of the opportunities out there and continue to be amazed at the breadth of the market opportunities," said the CEO.

Other companies fighting for the same business include AudioCodes Ltd. (Nasdaq: AUDC), Cisco Systems Inc. (Nasdaq: CSCO), Data Connection Ltd. (DCL) , Ditech Networks Inc. (Nasdaq: DITC), Juniper Networks Inc. (NYSE: JNPR), NexTone Communications Inc. , Newport Networks plc (London: NNG), Sansay Inc. , and Sonus Networks Inc. (Nasdaq: SONS). (See AudioCodes Takes Netrake, NexTone Gets a Loan, and Juniper Kills Its Session Controllers.)

— Ray Le Maistre, International News Editor, Light Reading