So, why all the fuss?
Acme makes communications equipment bought by phone companies and other telecommunications providers to route Internet traffic between different parts of their networks. The sense is that demand is picking up among customers, perhaps more so than is reflected simply in Wednesday night’s results.
Piper Jaffray analyst Troy Jensen and Deutsche Bank analyst Brian Modoff both raised their ratings on the stock, in Jensen’s case from Market Perform to Outperform, and in Modoff’s case from Hold to Buy. They both have price targets on the stock of $15, which is substantially above Wednesday’s closing price of $10.42.
Jensen’s reasoning is that the company added 34 new customers, for a total of 420, and not counting Sprint (S), one of the company’s largest customers, revenue actually rose 34.6% from the first quarter — suggesting the company is growing faster than the nominal 7.7% quarter-over-quarter sales growth that Acme reported Wednesday night. Management’s forecast for sales of as much as $112 million this year represents 33.2% year-over-year sales growth, points out Jensen. Jensens says the company deserves a 35x multiple of projected earnings because it should see growth in operating earnings of 35% to 40%, compounded, over the next several years. He notes that the company’s operating profit margin, as a percentage of sales, rose 1.4 percentage points to 26.4%. Similarly, Modoff says there are “signs of acceleration” in Wednesday night’s report. It’s mostly about the new customer wins, not the financial results. “We think signs of increasing customer adoption mark a potential inflection point,” says Modoff. “Acme saw particular strength in Europe where competition among operators is driving the voice-over-Internet-Protocol market,” he adds. “Carriers customers are increasing their deployments of Acme gear and adding features and upgrades.” Modoff’s version of the $15 price target calls for the stock to trade at 33x. Meantime, Canaccord Adams analyst Edward Jackson is raising his price target from $16 to $17, which would represent a 40x multiple of his estimate for next year. He’s raising his sales estimates, but only slightly, for this year and next, to $111.8 and $146.3 million, and his profit estimates by a few pennies. The number of customers who spend $1 million or more on the company’s gear has risen from 5 at the end of 2004 to 31 in the second quarter, notes Jackson, citing management comments. Jackson says the company’s “session border controller” equipment is “developing into one of the most important segments of next-generation networks.” ThinkEquity analyst Anton Wahlman has a $25 price target, if you can believe that, though his estimates are not much above those of the other guys. His target price is a 52x multiple of his estimated profit per share of 44 cents; or, seen another way, 10x his estimate for sales next year, plus cash. Like the others, Wahlman cites a litany of metrics that management mentioned, showing the company is digging deeper into its customer base. In conclusion, he writes, “Acme recapped the three-step growth strategy: Acquire customers, Partner with customers to build their success, and Leverage incumbency to grow revenue depth in the account. It has now “done the hard work” of getting into the customers, has built breadth at 76 of the top 100 global service providers, and is now focused on building depth." So who’s the spoiler? Goldman Sachs analyst Brantley Thompson, who’s suspicious of the company’s forecast of as much as $112 million. He’s lowering his price target to $12 from $17! That’s a 25x multiple of an estimated 50 cents a share for next year. Thompson implies that there’s some downside to digging deeper into existing customer accounts in order to grow the business: maybe it means fewer new customers coming on board, and, hence, greater dependence on the eggs that are already in the basket, if you will. Quoth Thompson: Management believes it is seeing larger purchase orders from existing customers that will support its growth outlook. In our view, any such transition has inherent risk, we will monitor the coming quarters to better gauge this transition.
Acme Packet shares, up almost 23% at $12.78, are still off 38% this year and over 19% in the last 12 months. Wow.
APKT 6-mo chart: