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business newsWhy Adtran Was Bludgeoned on Acme Packet's Miss
By
Fil Zucchi
Jan 05, 2012 10:30 am
The answer can be found, in part, by looking at the landscape of other tech companies.
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Minyanville reader, Vince, writes:
Considering we are about to get Q4 results from most companies, let me answer that question with a longer recap of how I see the landscape for some of the tech companies I follow and own.
Post Tekelec (TKLC) going private, Acme Packet is left as pretty much the only pure play supplier of “session border controllers” which is a key component of VoIP and data networks. Sluggish sales of SBC’s can certainly be a canary for sluggish sales of telecom equipment in general, particularly to telecom carriers. Since Adtran and Acme Packet share a lot of clients, it wasn’t much of a leap to hammer Adtran in sympathy with Acme.
But here are the more important questions, in my humble opinion: First, how much did the chaos created by the failed AT&T (T)/T-Mobile (DTEGY.PK) merger cause all carriers to pull in their horns? (I am out of town so I’ve not had the chance to listen to Acme's call or read research notes.) Second, if it is a more fundamental slowdown, is it limited to the carrier space? Third, will disappointments show up in Q4 results or 2012 guidance? Fourth, with many companies in this space having been hammered already, which ones already discount bad news?
I’m hesitant to believe that the AT&T merger was a primary cause of Acme Packet’s miss. Even though Acme blamed the U.S. carriers more than the foreign ones for its shortfall, I can’t shake the long-standing feeling that Euroland is going to be a problem for many companies in this space. I’m also skeptical that only carriers are slowing their spending. Private companies with large networks may well be picking through their 2012 budgets with a fine-tooth comb.
On the somewhat “brighter side,” my guess is that most Q4 results might come in fine, or perhaps even ahead of estimates (budget flushes ahead of austerity?), but guidance will rule the roost. And looking at some of the stocks I own, there just isn’t that much fluff left in the price before balance sheets and cash flows step in as a natural backstop.
So, to keep it practical, here is my cheat sheet of what worries me and what doesn’t:
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Considering we are about to get Q4 results from most companies, let me answer that question with a longer recap of how I see the landscape for some of the tech companies I follow and own.
Post Tekelec (TKLC) going private, Acme Packet is left as pretty much the only pure play supplier of “session border controllers” which is a key component of VoIP and data networks. Sluggish sales of SBC’s can certainly be a canary for sluggish sales of telecom equipment in general, particularly to telecom carriers. Since Adtran and Acme Packet share a lot of clients, it wasn’t much of a leap to hammer Adtran in sympathy with Acme.
But here are the more important questions, in my humble opinion: First, how much did the chaos created by the failed AT&T (T)/T-Mobile (DTEGY.PK) merger cause all carriers to pull in their horns? (I am out of town so I’ve not had the chance to listen to Acme's call or read research notes.) Second, if it is a more fundamental slowdown, is it limited to the carrier space? Third, will disappointments show up in Q4 results or 2012 guidance? Fourth, with many companies in this space having been hammered already, which ones already discount bad news?
I’m hesitant to believe that the AT&T merger was a primary cause of Acme Packet’s miss. Even though Acme blamed the U.S. carriers more than the foreign ones for its shortfall, I can’t shake the long-standing feeling that Euroland is going to be a problem for many companies in this space. I’m also skeptical that only carriers are slowing their spending. Private companies with large networks may well be picking through their 2012 budgets with a fine-tooth comb.
On the somewhat “brighter side,” my guess is that most Q4 results might come in fine, or perhaps even ahead of estimates (budget flushes ahead of austerity?), but guidance will rule the roost. And looking at some of the stocks I own, there just isn’t that much fluff left in the price before balance sheets and cash flows step in as a natural backstop.
So, to keep it practical, here is my cheat sheet of what worries me and what doesn’t:
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Adtran does not worry me much; at 8.5x EV/EBITDA and an 11 P/E against depressed expectations of 7% 2012 growth this puppy has been left for dead. In addition, its exposure to carriers is mostly in the “backhaul” space, which is one area where needed upgrades cannot be deferred.
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Juniper Networks (JNPR) is where I would have expected a bloodbath in sympathy with Acme Packet; down $0.29 suggests that this one has a lot of bad news priced in. That said, I think Cisco’s (CSCO) resurgence is going to put a lid on Juniper for a couple of quarters.
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F5 Networks (FFIV) scares the you-know-what out of me at these prices; it is in a sweet spot as far as products are concerned and it has some major software upgrades rolling out, but there’s a lot of hot money here, and the valuation leaves little room for error. It reports before January option expiration and volatilities in the 70s (17% implied move) may be just in line with the kind of move we might see – up or down.
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Riverbed (RVBD) is a little less worrisome than F5 but not by much and could see a very similar binary move when it reports.
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EMC (EMC) and NetApp (NTAP): I know I’m going to eat my words, but these look like “gifts” at current prices, particularly if one has a 6- to12-month time frame. Shorting a wee bit of VMware (VMW) or some out-of-the-money calls against EMC’s 80% stake in VMware might work as a hedge. If either get hit on their reports – barring something totally out of left field – I could easily make these major stakes.
- And lastly... Acme Packet. I have been very lucky on this one because I’ve been toying with buying it since the $40 area and for one reason or another I never pulled the trigger. Even after today’s drop it's far from cheap, at 15x EV/EBITDA and a 20 P/E on questionable 25% 2012 growth rate; but there is a degree of scarcity value because of where it sits in the technology food chain. I’m in no rush to get in – weekly DeMark counts are nowhere close to signaling selling exhaustion – but there will be a point where getting long will prove very profitable. For now the most I’d dare is to buy ratio put spreads to get me long below $20.
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Positions in EMC, NTAP, RVBD, FFIV, JNPR, ADTN
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