AudioCodes Takes Netrake
AudioCodes announced its $90 million Nuera deal in mid May, which gave it a broader portfolio of media gateway products and a toehold in the cable operator market. (See AudioCodes Nabs Nuera for $90M.)
Now, with Netrake, AudioCodes CEO Shabtai Adlersberg says the company has three critical IP Multimedia Subsystem (IMS) network elements -- media gateway, media server (or media resource function, MRF), and session border controller (border/breakout gateway controller). (See IMS Guide.)
Netrake has also developed a security gateway for fixed/mobile convergence deployments, particularly those based on Unlicensed Mobile Access (UMA) technology, and teamed up with Alcatel (NYSE: ALA; Paris: CGEP:PA) to address that rapidly expanding niche. (See Alcatel Uses Netrake, Reef Point Lands $21M, Gets Woody, Kineto, AudioCodes Trial UMA, and IMS Imperils Mobile Security.)
Investors liked the news, as AudioCodes saw its share price jump by $0.23, more than 2 percent, to $11.13, though that's some way down from the $13 price following the Nuera acquisition.
And Piper Jaffray & Co. analyst Troy Jensen reckons it's "definitely a good move" for AudioCodes, though he's surprised Netrake's investors, who had pumped more than $70 million into the company, didn't "hold out for a better offer. It's a cheap way for AudioCodes to enter the market." (See Netrake Rakes In $20M Funding .) [Ed. note: Maybe there wasn't a better offer to hold out for.]
Jensen reckons there are two good reasons for AudioCodes' move. First of all, when Netrake rival Acme Packet Inc. (Nasdaq: APKT) filed for an IPO last month it revealed first-quarter operating margins of more than 30 percent, notes Jensen. "I think AudioCodes saw this and decided it needed a play in that market." (See Acme Packet Lines Up IPO.)
Secondly, the company needs a new growth market to fall back on when the media gateway sector reaches saturation. "The media gateway market will ultimately decline after a few more years of rapid growth, so AudioCodes needed a SBC offering to offset gateway declines in the future," states Jensen in an email response to questions.
AudioCodes says Netrake will become a subsidiary when the acquisition closes during the current quarter, and that the nCite SBC and security gateway will be retained as standalone products at least until AudioCodes' next-generation product development cycle, when it's likely to be integrated into the company's media gateways. That won't be for another 18 to 24 months, though.
During that period the SBC market is set to grow quickly. During a conference call today, CEO Adlersberg cited market projections from Infonetics Research Inc. that valued the SBC market at $88 million in 2005, an estimated $180 million this year, and growing again to $310 million in 2007.
But although Netrake has been around for years as one of the sector's known names, it hasn't generated much business. Revenues in 2005 were just $5 million (a 6 percent market share), and AudioCodes expects that to grow to just $6 million this year (3.3 percent share) and about $9 million in 2007 (2.9 percent market share).
AudioCodes doesn't expect Netrake to reach breakeven -- which requires revenues of $5 million to $6 million per quarter -- until the end of 2007, and for the acquisition to be dilutive to the company's earnings by $0.07 in both 2006 and 2007.
But Adlersberg sees potential in having a trio of IMS elements in his product set, and he believes Netrake has struggled because it has focused so much on R&D (accounting for about half its 60 staff) and building decent technology, and not enough on sales and marketing, though the company has landed some big name customers. (See Netrake Lands Telefonica and Netrake, Level 3 Voice-Enable IM.)
Ben Rabinowitz, AudioCodes' VP of marketing for North America, added during today's conference call: "What Netrake has lacked is a big sales team and international presence," and that's something the AudioCodes team can address, as the decision-makers are often the same for media gateways and SBCs. Carriers also need to be helped, he added. "A lot of service providers know about session border controllers, but don't know how to use [them]."
So how will this all affect the market and the competitive landscape, where Acme, Ditech Networks Inc. (Nasdaq: DITC), Juniper Networks Inc. (NYSE: JNPR), NetCentrex SA , NexTone Communications Inc. , Newport Networks plc (London: NNG), and Sansay Inc. are among those competing for the spoils? (See Juniper to Acquire Kagoor, Ditech's Itsy Bitsy Jasomi Deal, and Newport Sinks & Shrinks .)
Kevin Mitchell, director of solutions marketing at Acme, reckons it's probable that Netrake's SBC "could be pitched in more opportunities in the future due to AudioCode's reach, but a bigger company acquiring SBC technology doesn't automatically translate into market success," he notes, alluding to Juniper's acquisition of Kagoor.
"I don't suspect the landscape will radically change in the near term as the product that Acme Packet competes against will be the same," adds Mitchell.
— Ray Le Maistre, International News Editor, Light Reading