Shares of networking equipment vendor Acme Packet (APKT) are up $1.39, or over 5%, at $26.92 after Barclays Capital’s networking analyst Jeff Kvaal raised his rating on the stock to Overweight from Equal Weight, as part of a 60-page report that asserts the company is one of a handful that could benefit from increasing use of�voice-over-Internet Protocol, or VoIP — basically, Internet calling — by phone companies.
Other beneficiaries, he thinks, include Broadsoft (BSFT) and Shoretel (SHOR).
“Ongoing enterprise adoption, improving reliability, and a suite of new technologies should drive IP voice traffic materially higher,” writes Kvaal, who assigned a $33 price target to Acme shares.
Kvaal started Broadsoft at Overweight, as well, with a $46 price target. He rates Shoretel Overweight as well, with a $9 price target.
Telcos are increasingly bringing VoIP to their networks, writes Kvaal, using technologies that have been evolving for many years and that have mostly been used by enterprises, such as “session initiation protocol,” or SIP “trunking”:
The primary technologies in carrier networks that will enable the drivers mentioned above include: 1) SIP trunking which emerged meaningfully in late 2010 and 2011, 2) hosted/managed services, 3) voice-over-LTE or VoLTE, and 4) fixed mobile convergence or FMC. We also believe that traditional class 5 switch replacement will be a meaningful enabler. A relevant example of these services coming to market is Verizon�s hosted IP solution offered to enterprise customers. Another example is AT&T�s recently announced universal voice platform (UVP) offering SIP trunks and hosted solutions for enterprises and consumers. We believe projects similar to both of these will continue to pop up across the carrier landscape. We discuss these tec! hnology enablers in further detail below.
A key technology, writes Kvaal, is the “session border controller,” or SBC, a routing device for directing flows of data between carrier networks:
The SBC market has been a large success story in carrier VoIP. It was initially driven by IP peering (sharing and need for segmentation of IP traffic across carrier networks) but more recently has been driven by SIP trunking. The SBC market grew 25%-30% to about $450M in 2011 and sent Acme to a market cap that once reached $5 billion. Although the market traditionally is dominated by SBCs for wireline service providers (roughly two-thirds of the market), growth is coming from the enterprise and wireless carrier SBC segments. For ?example, Acme Packet�s enterprise sales grew more than 50% in 2011 compared to ~28% service provider growth.
Kvaal expects Acme to remain at the top of the pack in the product category:
We expect Acme Packet to remain the leader in the SBC market in 2012. Acme Packet continues to maintain a technological advantage and deep customer engagement based on their history. While carriers are increasingly looking for second source providers, it will be difficult for competitors to meaningfully uproot their hold on this nascent market in the near term, in our view. We discuss our Acme Packet upgrade in full detail at the end of this report.
Kvaal also cut his rating on�Polycom�(PLCM) to Equal Weight from Overweight, following the company’s Q1 warning last week. Kvaal is “optimistic�about the long term adoption of videoconferencing,” the company’s bread and butter, he writes.
However, “Polycom’s position in the market faces pressure not only from Cisco, but from traditional consumer-oriented services such as Skype and FaceTime.” Polycom is addressing this risk with vigor and inherent advantages,” he thinks, ! but he h as low confidence in a “near-term recovery.”
Shares of Shoretel are up 3 cents, or 0.6%, at $4.91. Broadsoft are up $1.54, over 4%, at $38.80. Polycom shares are down 14 cents, or 1%, at $13.77.
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