Xconomist of the Week: Andy Ory on the Real Opportunity for Acme Packet

Acme Packet is not the easiest technology company to write about. If you’re not careful, you end up bogging down in things like SIP trunking, IMS deployments, session delivery solutions, and other Internet Protocol networking lingo.

Fortunately, Acme Packet’s co-founder and CEO, Andy Ory, makes things easy. Ory has led the Bedford, MA-based company (NASDAQ: APKT) from the beginning, and he’s seen a lot of things over his 12 years there—and at his previous company, Priority Call Management, which he sold in 1999. As he explains, his company’s big opportunity has to do with providing secure and efficient communications and data networking in the Internet cloud. This impacts everyone from big companies to telecom operators to social Web firms, but it also affects consumers, who are using all sorts of different devices and networks to communicate in their daily lives.

“If you make a phone call, it’s quite possible your voice is passing through an Acme Packet product to help set up the call and maintain quality,” says Ory, an Xconomist.

Yet things have not been easy for Acme Packet as of late. While the company’s revenues grew to $307 million last year, with close to $80 million in profits, the company’s stock price has fallen from around $70 last spring to less than $30 now—and its market cap from $5 billion to $1.8 billion.

If Ory’s worried, he’s not showing it. Acme Packet, which went public in 2006, has always been about long-term growth, and that hasn’t changed. Besides, the company has shown it can take a punch and come back strong. Back in 2008, in the midst of the recession, Acme’s stock fell below $4 before rebounding strongly over the next few years. The current market volatility and increasing complexity in IP networks, however, makes it really important for Acme Packet to continue elucidating its value proposition.

Acme Packet makes session border controllers, which is technology to help telecom network operators and enterprises manage voice-over-IP and other Internet services in a secure, efficient, and regulation-compliant way. What’s more, the company could play a big role in several fast-evolving tech arenas: helping wireless carriers compete with the likes of Apple and Google for control of mobile apps; unifying video communications like Skype and Apple’s FaceTime; and providing security and compliance for big businesses’ cloud-based systems. In short, Acme Packet could help redefine what “phone” companies and “software” companies actually do.

Here’s Ory’s snapshot of where the company stands today: “We have between 750 and 800 people. We crossed the billion-dollar mark for products shipped in terms of revenue. We have 16,000 products deployed in 107 countries. We added 300 or so customers last year. And I think we’ll actually pass $100 million of aggregate revenues with two different customers of ours, showing the capacity for what large service providers can buy,” he says. “We’re single-digits [percentage] of the way into this opportunity.”

I sat down with Ory earlier this month at Harvard University (his alma mater), where he was leading a meeting for analysts, press, and potential partners. Here is an edited transcript of our conversation:

Xconomy: Can I get your thoughts on the ups and downs of Acme Packet’s stock?

Andy Ory: When people value an enterprise they look at its operational characteristics, and they project that same operational characteristic onto future opportunities, and then they can extrapolate a value. You can be simple and say, “Some of the very rapid growth has slowed down somewhat.” Though if you look at our bookings growth rate over the last five years, it’s been on average 28 percent. Between 25 and 30 percent is probably the way to think about our past and future opportunity. What people are wrestling with right now is how to understand the opportunity. It’s the magnitude, the imperative, and our market positioning. These are the three things people are coming to grips with. And as they do, I think you’re going to see the enterprise value fall in line with the opportunity.

X: How big is that opportunity, really?

AO: People think that voice services aren’t worth much. If you took gaming, social, and search, and tied all that revenue together, it comes to about $70 billion last year. It was about a trillion dollars in voice services. It’s not even close. What people are paying for isn’t really voice—what they’re paying for is … Next Page »

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