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Acme Packet, Inc. (APKT)

Q2 2010 Earnings Call Transcript

July 29, 2010 5:00 pm ET


Brian Norris – Director, IR

Andy Ory – Co-Founder, President and CEO

Peter Minihane – CFO


Paul Silverstein – Credit Suisse

John Marchetti – Cowen & Company

Brian Modoff – Deutsche Bank

Simona Jankowski – Goldman Sachs

Catharine Trebnick – Avian Securities

Rich Valera – Needham & Company

Simon Leopold – Morgan Keegan

Sanjiv Wadhwani – Stifel Nicolaus

Jeffrey Britt – Janney Montgomery Scott



Good afternoon, ladies and gentlemen and welcome to the Acme Packet's conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) Also as a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's call, Brian Norris, Director of Investor Relations for Acme Packet. Please go ahead.

Brian Norris

Thank you, Tony. Good afternoon, everyone. Welcome to our 16th quarterly conference call. I am Brian Norris, Director of Investor Relations and I'm joined by Andy Ory, our President and Chief Executive Officer and Peter Minihane, our Chief Financial Officer and Treasurer.

The format for the call is as follows, Andy will begin with a high level review of our second quarter results. Peter will then follow with a detailed financial review and a discussion of our updated outlook for 2010. Andy will then provide an update on the key growth drivers for 2010. We will then open the call up for Q&A.

All results and expectations we review this afternoon are on a non-GAAP basis unless otherwise described as GAAP. During our call, we will be referring to non-GAAP net income and non-GAAP net income per share, which are non-GAAP financial measures, which for all periods presented exclude stock based compensation expense and amortization of intangible assets related to the company's acquisition of Covergence in April of 2009.

Our non-GAAP results for the three-month period ended June 30, 2009 also excludes merger and integration related costs again related to the acquisition of Covergence. The press release announcing our second quarter financial results along with our financial statements and our reconciliation of GAAP to non-GAAP measures is available on the Investor Relations section of our website at

Statements made during this call that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may relate, among other things to our expected financial and operating results for our future business prospects and to forecasted market conditions. Such forward-looking statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from those anticipated. A discussion of these risks and uncertainties is contained in our recent filings with the SEC, including those factors discussed under the caption Risk Factors in such filings. Investors should not place undue reliance on these statements, which are current only as of the day they are made and we disclaim any obligation to update them. In light of Regulation Fair Disclosure, we will not comment on our business outlook during the quarter unless we do so explicitly through a public disclosure.

Before I turn the call to Andy, we’ll briefly bring our attention for upcoming investor event on August 9, it will be in Vail, Colorado for the Pacific Crest Technology Leadership Forum and on 11th will be in New York for the Morgan Keegan Technology conference. Well, September 14 will be in San Francisco for the Deutsche Bank Technology conference and finally on September 15 will be in Boston, Credit Suisse small cap conference. One last calendar item, please make plans to join us at 5 00 p.m. Eastern Time on Thursday, October 29 for our third quarter earnings results conference call. For more details on our IR outreach plans for the third quarter, please feel free to contact me at 781-328-4790.

With that, I'd like to turn the call over to Andy.

Andy Ory

Thank you, Brian and good afternoon, everyone. We are pleased to be reporting the strongest quarter in the company's history. Our second quarter results were highlighted by record revenue, gross margin, operating margin, earnings and ending cash.

Total revenue increased to a record $53.3 million in the second quarter, reflecting growth of 62% year-over-year. Gross margin expanded to a record 84% we now expect gross margins to remain in the low 80s for the remainder of the year.

Operating margin expanded to a record 36%. We now expect operating margin to be in the low to mid30s for the remainder of the year. Longer term we are modeling operating margin in the low 30s as we make investments across the organization to drive further top line revenue growth.

We reported record non-GAAP EPS of $0.18, up from $0.07 in the second quarter of last year. We reported record GAAP EPS of $0.14 up from $0.03 in the second quarter of last year. We further bolstered the strength of our balance sheet. We ended the second quarter with a record $217 million in cash up nearly $29 million sequentially while deferred revenue was unchanged sequentially, deferred product revenue increased by approximately $2.8 million. DSOs improved to 46 days, down from 52 days in the first quarter.

Beyond the financial highlights, we added 54 new customers in the second quarter. This included 23 new service provider customers and 31 new enterprise customers, including six members of the Global 500. We added over 125 new customers in the first half of 2010 and now serve the needs of over 1100 customers in over 100 countries.

We continue to see evidence of our expanding market share. According to Infonetics Research, our share of the service provider SBC market had expanded to 62% by the end of the first quarter of 2010 compared to approximately 50% at the end of the first quarter of 2009.

We extended the reach of our solutions to small and medium enterprise sites and small contact centers with the launch of the powered by Acme Packet Program. This initiative enables IP communication solution providers to embed Acme Packet's Net-Net OS-E session border controller software into network elements at the rapidly growing number of enterprise IP borders.

On the product innovation front, we introduced our new Net-Net 3820 platform, which is targeted at both small and midsized IP communication service providers and mission critical enterprise and contact center applications.

Based on the strength of the business during the first half of the year and the growth drivers we are seeing in our key markets, we are again raising our outlook for 2010. We are updating our earlier outlook, which called for 45% revenue growth and 90% earnings growth in 2010.

We now expect revenue of between 214 million and $218 million, an increase of approximately 53% over 2009. We expect to report sequential revenue growth in both Q3 and Q4. We now expect non-GAAP EPS of between $0.72 and $0.74 per share, an increase of approximately 109% over 2009. We believe we can deliver on this upwardly revised business plan while also properly positioning the company for 2011.

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