Acme Packet: Fallen Angel May Be Grounded For Awhile

| About: Acme Packet, (APKT)

Only a year ago, Acme Packet (NASDAQ:APKT) was a chart-topper in the Investor's Business Daily power ratings, selling for $85/share. Twelve months later, it crosses the tape at $15 after reporting disappointing numbers and outlook in its Q2 conference call. I completely missed the boat on this one, recommending and buying the stock initially at $25/share three months ago, and dollar-cost-averaged down at $18. However, I am still long the equity, and like its prospects, but it will take some time for Acme Packet's business to pick up, according to CEO Andy Ory.

I really thought the last quarter would help grease the wheels on an equity that had fallen significantly, despite macroeconomic headwinds in Europe. The stock had been bid up by the investment community in 2011, and its P/E ratio reached unsustainable levels. A gravitational pull put it back on my radar screen, although I've been writing about Acme Packet for well over a year now.

What happened was two domestic carriers, Verizon (NYSE:VZ) and AT&T (NYSE:T), decreased their spending on VoLTE (voice over long term evolution) for this year. The combined contributions from both carriers will decline 25% for calendar year 2012. The previous yea-over-year guidance was flat. It was a real shock to the system since they are very large customers for Acme Packet. Verizon accounts for 13% of the company's business.

Before I get into the intangibles in the conference call, I want to get into some of the numbers based on what Mr. Ory and his team indicated. Management's guidance for 2012 is now $.43/share-$.47/share. That gives us a P/E Ratio of roughly 33. That's not good, especially since they are expecting earnings to be flat for 2013. Although there might be growth next year, there is no guarantee since Mr. Ory seems overly cautious going forward for the foreseeable future. My first impression in calculating the P/E ratio is that Acme Packet is still expensive if you go by that metric.

On the revenue side for this year, guidance dropped from $340 million to $270-$275 million. The good news is that they have a war chest of $400 million in cash to weather the storm. Gross margin is near 83%, which is close to the 2011 level. In addition, as far as clients are concerned, the win rate remained above 90%. The win rate is wins on competitive bids. They are adding customers.

You can't be thin-skinned if you want to be CEO, and Mr. Ory never batted an eye as he took questions concerning the future of his company. Although SIP trunking is accounting for the lion's share of Acme Packet's enterprise business, and diameter signaling could be another long-term growth driver, I am going to focus the remainder of the article on Voice Over LTE because this is where they stand to gain the most ground. Initially, VoLTE will be adapted by carriers, not the enterprise, or at least that is my impression.

If you aren't familiar with Voice Over LTE, here's a brief description from a Paul Kapustka article in PC World: "Most next-generation or so-called 4G wireless networks use Long Term Evolution technology...This technology is necessary mainly because LTE is a data-only networking technology...LTE turns the network around and uses Internet Protocol packets for all communications. As such, it doesn't support traditional voice-call technology, so a new protocol and applications for Voice over LTE are needed."

One item Mr. Ory highlighted that specifically pertains to the slowdown of the VoLTE buildup is that it has proven to be complex from a business model. In fact, one of the company's Tier 1 clients had to change their business model dramatically to facilitate the upgrade. This delays the buying cycle for other customers, which is usually nine months. However, it is inevitable that VoLTE will become the norm because it has more spectrum, and is cheaper to operate than 3G.

With over 85 of the top 100 service providers as clients, global opportunities abound in VoLTE for Acme Packet. According to Mr. Ory: "While in the first half of 2012, there have been publicly announced schedule delays for early VoLTE rollouts, we continue to remain bullish on our opportunity in this area. Beyond the 10 architectural wins we have already secured, we are actively pursuing 26 additional opportunities. VoLTE provides deployment opportunities for every one of Acme Packet's session delivery network products."

Considering Acme Packet has first mover advantage in the session border control market, this is good news. But as an investor, when will this stock get back into gear again? Many factors are involved, but mainly, it has to to with increasing the bottom line. Initially, Mr. Ory painted a much brighter picture for the near term outlook by stating: "Looking at the North American service provider market as a whole, while many of our customers are engaged in projects related to Voice over LTE, or VoLTE, we believe that it will be 2013 before it has any meaningful impact on our business."

The year 2013 is only five months away, and that doesn't sound like too long of a wait. However, when Joanna Makris of Mizuho Securities pressed him on the issue, Mr. Ory indicated it may not be until 2014 when many international VoLTE sales will come to fruition because of the long sales cycle. For North America, probably late 2013. For most investors, that delay is an eternity, and you may be sitting on dead money for the time being if you are long Acme Packet.

Disclosure: I am long APKT.