Thursday, April 19, 2007

Acme Packet Equity Coverage

Colleague Catharine Trebnick has been covering IP communications companies for many years, and certainly has a good perspective on technology trends. Currently, she�s a Research Associate with FTN Midwest Securities, and they just initiated coverage of Acme Packet.

She�s put together a nice report on them, which I�ve had a chance to review. Basically, her view is positive and sees Acme as having a defensible niche for session border controllers. The report tags Acme as a buy, with a target price of $18.55.

There has been an ongoing concern that SBC functionality will be subsumed by other network elements such as routers, gateways and firewalls. To some extent this is happening, and Catharine explores all these scenarios and the various SBC architectures. However, her view � which is similar to mine � is that Acme has built up sufficient traction with Tier 1 carriers, and they continue to build out the platform, making it an even stronger offering that will be difficult to displace.

Another concern often voiced is whether Acme can sustain its high margins and profitability, which was a key factor behind the success of their IPO. Catherine sees an inevitable decline coming in these metrics, but not enough to derail the company or their growth prospects. One of the key reasons is that this is still an early stage market, and growth will come from two sources. First are the existing customers � which Acme has in spades � who will keep buying from them as they continue to transition traffic from TDM to IP. Second is the untapped market, which is even larger, and Acme is as well positioned as anyone to capture their share as SBCs become a must-have for carriers getting into IP.

Not only do they have the dominant solution for Tier 1 carriers, but they have now come to market with a disaggregated offering where the media and signalling pieces are offered separately. This gives them more options to sell into the much broader market populated by the Tier 2/3 carriers. This remains to be seen, but they clearly understand that this end of the market has different needs than Tier 1 carriers.

Catharine�s report also does a nice job outlining the competitive landscape, which is broader than you might think. There�s discussion there about what the telecom vendors have been doing with SBCs, as well as who the other major players are. She notes that NexTone is Acme�s strongest competitor, and is next in line in this space for an IPO. No argument there.

If you want to follow up with Catharine about her report, feel free to contact her directly.

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