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  • Why I'm Long APKT
    there has been quite a bit of fear surrounding apkt, so i thought i'd take a few minutes to address why i'm long and not concerned about some of the fear points raised by others. please comment if you disagree with any of my assumptions below.

    what are the common fears cited on these boards (and among other traders)?

    1. service provider capex budgets are weak, and so therefore apkt will warn again (next week) and lower guidance again for the full year.

    2. their core session based controller market is a commodity and it's only a matter of time that others will take market share and/or compete on price resulting in lower margins.

    3. it's expensive.

    4. insiders have been selling a lot

    why i'm long:

    1a. i know service provider capex budgets are weak. if you own this stock and don't know that, you've been on the beach too long. adtran (NASDAQ:ADTN) and audiocodes (NASDAQ:AUDC) both negatively preannounced in the past couple weeks.

    1b. apkt already tanked numbers for the year. they guided full year revenue growth to 10%.

    1c. you don't need to be heroic to get to 10% revenue growth. growth in their enterprise business alone gets you to 10-15% overall growth. if you break apkt's sales down between service provider and enterprise, you'll see that enterprise represents about 20% of sales. but a portion of the service provider revenue is related to service provider spend required to support enterprise adoption. so the real breakdown is 65% service provider, 35% enterprise. the enterprise market is growing at 40%. so 35% of apkt's business is growing at 40% = 14pts of growth growth. this will continue as enterprises are taking advantage of IP infrastructure to lower costs and provide increased functionality/flexibility. the ROI on moving to IP based VoIP is very strong.

    1d. 10% overall growth, with 14pts coming from enterprise alone, means apkt has already baked in a decline in their service provider business. for them to guide down again, you'd have to see a massive decline in spend. that's unlikely, as AT&T has already release their capex budgets and that budgeted spend is pretty significant. yes, it's true, service provider spend was very weak in jan and feb - adtran told us that a couple weeks ago. but what adtran also told us is that spend picked up in march. that makes sense because at&t capex was released in late feb. this data is also supported by the commerce department report yesterday on durable goods. telecom equipment spend was up a lot in March.

    1e. not all of apkt's service provider revenue is north america based. so while at&t and verizon might be weak, apkt's international sales should continue to grow in the 15-20% range. north america is about 60% of their sales. let's assume this geographic mix holds true for both service provider and enterprise (i'm not sure of this, so this is just an estimate), such that mix looks like this:

    as stated above:

    65% service provider

    35% enterprise

    assuming 60%/40% north america/international, then service provider revenue can be further broken out between n.am. and intl as follows:

    39% north american servie provider (65% x 60%)

    26% international service provider (65% x 40%)

    35% enterprise

    1f. so you have 35% of apkt's enterprise business growing at 40% = 14pts of growth + 26% intl service provider growth at 15% = another 4pts of growth, for a total of 18% growth. to get to 10% overall growth, you'd have to believe the remaining 39% north american service provider revenue would have to **decline** by 20% to get to 10% overall revenue growth. pretty drastic assumptions. i guess it could happen, but unlike other companies like adtran and audiocodes who factored in growth into their original expectations, seems like apkt has factored in pretty significant declines in service provider revenue.

    2. i don't believe apkt's product are as much of a commodity as some others on these boards suggest. apkt has 80%+ gross margins. you don't get 80% margins selling commodity hardware. software companies have 90% gross margins. the reason apkt has 80%+ gross margins is because what they are really selling is software. their software just works better than their competitors. which is why they **increased** their marek share in 2011. they have a dominant position such that all the next 5 competitors combined have less market share than apkt. you don't get that kind of share because your product is a commodity. the software is just better than others because apkt is solely focused on SBC's and they have the R&D focus on this niche product that no of the other competitors has. now, the one concerning data point is that they lost market share in Q42011. one quarter doesn't make a trend, so it's worth watching. but my view is that SBC purchase decision is based on who's software works better. and once you pick one (in this case, apkt's product), you tend to standardize on that product because of interoperability.

    3. it's just not that expensive given the overall market opportunity. so they've tanked numbers for this year. consensus is assuming 10% revenue growth, with operating margins going from 37% last year to 33% this year. which gets you to $1.00 in non-gaap eps. let's take my #s above (n. am service provider **down** 20%, intl service provider +15%, and enterprise +40% (all this combined gets you to 10% revenue growth in 2012) to look at what the mix of business by the end of 2012 will look like:

    28% n. am. serv provider

    27% intl serv provider

    45% enterprise

    the "crappy" part of their business (n. am. service provider) is getting smaller and smaller.

    now let's be conservative and further assume n. am. is flat in 2013 (i think it could be up with Voice over LTE, but let's assume it's flat). let's assume intl serv provider grows 10% and enterprise grows 30%. that get's you to 16% revenue growth in 2013. i think margins can expand from 33% to 35-37%, which would add another 6-12% in EPS growth, for a total of 22-28% EPS growth. that gets you $1.22 to $1.28 in EPS in 2013.

    3b. i think this is pretty conservative case. if n.am serv provider grows 5-10%, that would add 1-3pts of growth. if VoLTE takes off, that could add another 10-15pts of growth.

    3c. at the end of 2011, apkt had $5.60/share of cash. by the end of this year, they will have $6.60. so when we start to look at 2013 numbers, we have a $25 stock, letss $6.60 in end of year 2012 cash = $18.40. on $1.25 = 15x. if we get some upside from n.am. service providers or LTE, you could get $1.35 to $1.50 in EPS, or 14x or 12x respectively. this is for a business that should still be able to grow top-line mid-teens and eps about 20%, is only a $1.5bn market cap ($1bn enterprise value) which makes it a very digestable/attractive acquisition candidiate.

    4a. yes, insiders have sold a lot. more than $300m since they went public. melampy's sales are probably the most disturbing. i guess the only things that give me **small** comfort is that it seems he has a scheduled 10b5 plan in place to sell 60k shares every two weeks (sells 60k 2x a month - mid month and end of month) as opposed to timing the stock. he's been selling exactly like this since Dec 2009, at prices starting at $10 (it's not like he only started selling at $80, and he didn't increase the number of shares he sold when the stock hit $80..he just kept selling the same # of share). his holdings went from 3.7m share to 2.7m shares over this time. while that a lot of shares, it's not like he's sold a majority of his holdings. we'd all probably do that same thing if we were in his shoes - diversify our net worth. CEO hasn't sold as much recently. CEO had a similar plan in place, but stopped selling in September. tells you what the CEO thinks about the value of the business. maybe he's shopping the business and doesn't want to sell stock. who knows.

    4b. if you read the recent proxy, you can read about management's incentives and salary. you'll see that the senior guys all were recommended for raises (why they deserve raises is beyond me, especially with the stock price performance of last year), but whatever...they got raises. but all but 1 of them choose to receive options struck at $35 in lieue of their salary increases. this happened in early Feb, after they released results. so you'd think they believe they can hit their numbers if they negotiated their compensation for the year based on Feb data.

    just my point of view. curious if anyone would take exception to any of my points above. thanks for reading and good luck.

    Disclosure: I am long APKT.

    Tags: APKT
    Mar 29 1:51 PM | Link | Comment!
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