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VoIP Systems

AudioCodes Takes Netrake

AudioCodes Ltd. (Nasdaq: AUDC) had a busy M&A Thursday, closing its acquisition of fellow media gateway specialist Nuera Communications Inc. and announcing the $11 million takeover of session border controller (SBC) vendor Netrake Corp. (See AudioCodes to Buy 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

digits 12/5/2012 | 3:49:39 AM
re: AudioCodes Takes Netrake Has AudioCodes landed itself a bargain here? $70 million of development for $10/$11M?

Seems to have been well received. Despite the expected impact on AudioCodes' EPS, and the relatively low growth expectations in a market due to more than double this year and grow by more than 70% in 2007, the stock is up 3%!
indiansipster 12/5/2012 | 3:49:38 AM
re: AudioCodes Takes Netrake Yeah, netrake has some great engineers who put in some long hours for years. I hope they get taken care of. I doubt they will though, specially after the show of gratitude to 3 of the folks they laid off yesterday who worked their butts off for that place. Looks like the netrake welfare is still in place, all the worthless ones are still there.
If it wasnt for the brilliance of 4 years in stealth mode they may have had a bit more presence in the marketplace.
I think that buyout number would have had another 0 in back of it if the real CEO we had wouldnt have had to quit after being diagnosed with Cancer.
THe company really inherited a great CEO after that, what a joke. Bozo the clown would have done a much better job.
indiansipster 12/5/2012 | 3:49:38 AM
re: AudioCodes Takes Netrake "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"

Ole Ben must not have done his homework. Netrake has had all kinds of sales and marketing teams move in and out. Problem is these marketing folks and Netrakes upper management would be better suited working on the back of a trash truck. I have never seen such a lousy team in my working career. Rumor has it they turned down 3 times this buyout amount not too long ago, doesnt surprise me a bit.
If Ben fires all the upper management who have been living on Netrake welfare for the last few years they may just be able to sell these products.
likeitis 12/5/2012 | 3:49:38 AM
re: AudioCodes Takes Netrake The real losers are the hard working engineers at Netrake - near beer is less diluted then what Netrakes stock would have been - upper management was the essence of good ol boy mentality - he is my friend so he must be good - anyone want to ask them for financial advice - lets invest 70+ million and end up with 10 mill. - man o' man
danfox 12/5/2012 | 3:49:34 AM
re: AudioCodes Takes Netrake Netrake has over 1 billion diluted shares. Even if the company sells for $200 mil, that's 20 cents a share. If an engineer's purchase price is $.25 a share, he is going to lose money. Do the math. With the job market as it has been for the last 3 years, anyone stayed with the company is either a lazy bud or a high dollar welfare receiver.

The company was ill-fated from the very beginning. The three founds combined has 0 years of experience in either telecomm or data network and one of them stayed 7 years as the CTO and claimed he can learn on the job.

The company builds its box on its own network processor. I never seen any company going into the network device market with unproven technology starts with expensive proprietary processor. What a waste of time and money. The processor is a slight diff from Agere's FPP. It's function can be totally replaced with Agere's off the shelf parts. Basically the company is a training play ground for those processor designers.

When the new CEO came in after the second round founding, the product has already been decided and there is only room for him to improve, but not to change.

The company is luck to be back by Austin VC who
bailed them out a couple of times. But since 2002 several SBC makers slowly snapped by Alctel,
Ericson, etc. I think the VC started losing faith in Netrake.

Nevertheless, with so many Netrake-claimed parters and test sites, I was expecting them to be skillful enough to convince a buyer for at least $100mil. The actual deal shows how poor they are in terms of timing.

Yes, a bunch of clowns.
likeitis 12/5/2012 | 3:49:33 AM
re: AudioCodes Takes Netrake not sure how U know so much about the internals but U are exactly right. This is the same group of leaders that thought Vonage would never make it and continuously put unqualified people in charge of charting the direction of the company. They never listened to the engineers who knew the direction VoiP was going. Its pretty funny that when Audiocodes released their press statement they said that Netrakes biggest problem was the sales force. Its funny because during the last 3 years the sales teams were treated like gods while wasting hundreds of thousands of dollars. If it wasnt for the strong engineering team they would have never lasted this long. So sad, how a few unqualified upper level managers could continuously make judgement errors, and of course never take responsibility. But I am sure they took care of themselves using the Netrake Welfare system.
fmc_man 12/5/2012 | 3:49:27 AM
re: AudioCodes Takes Netrake What's a bit counter intuitive (even though Audiocodes talks about buying an "SBC") is that Netrake was rumered to be in a number of UMA trials with Kineto as the security gateway. You'd think this application alone would justify more value. Those UMA trials will certainly now be looking for a new security gateway.
canuck 12/5/2012 | 3:49:26 AM
re: AudioCodes Takes Netrake Based on Kineto's website, it looks like AudioCodes is already one of their partners.
voyce_overipee1 12/5/2012 | 3:49:23 AM
re: AudioCodes Takes Netrake It may be a bargain, or they may have gotten what they paid for. There must be a reason they flopped in the SBC market and switched to a UMA sec-gateway, and I doubt it's sales people. I doubt acme or nextone's sales people are that much better. Most of these deals are based on technical merit and getting through lab and field trials. Only the big dog vendors like cisco, lucent, nortel, etc., get away with salesmanship.
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