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Analysts Question Sonus Forecast

Despite a disappointing second quarter, Sonus Networks Inc. (Nasdaq: SONS) is sticking to forecasts that seem to imply a big fourth-quarter jump -- a prediction that has some analysts worried, considering those orders have yet to be booked.

For its second quarter, Sonus reported a net loss of $7 million, or 3 cents per share, on revenues of $75.5 million. This compared with a net gain of $8.9 million, or 3 cents per share, on revenues of $64.5 million in the year-ago period. (See Sonus Reports Q2.)

Sonus's revenues met the forecast of $73 million to $76 million that the company gave late last month. Prior to the new forecast, Wall Street had been expecting revenues of $84 million for the quarter. (See Sonus Updates on H1, Nasdaq.)

Analysts were also disappointed by worsening gross margins, which fell to 57.9 percent from 64.8 percent in the first quarter, due to product mix.

Operating expenses declined sequentially, but still trended upward when compared to previous quarters. Excluding a $14.1 million charge related to the company's stock options review, opex decreased to $40.5 million from $43.4 million in the first quarter. That was still up from $33.9 million and $39.1 million in the third and fourth quarters of 2006, respectively.

While admitting that its first half results were not as good as they could have been, the company kept its financial guidance for the full year intact. Despite slower-than-expected first-half growth, Sonus reiterated expectations of 14 percent to 17 percent annual revenue growth for 2007, which would put sales in the range of $319 million to $327 million for the full year.

"Our first-half performance was dampened somewhat by the anticipated shift in the timing of some operators' capital spending plans to the second half of the year," Sonus CEO Hassan Ahmed said on the company's earning's call. "Our outlook for our business performance during 2007 remains unchanged. The change in the timing of orders is expected to impact only revenue recognition."

But some analysts question how the timing of revenue recognition will play out. With Sonus calling for flat revenue growth in the third quarter, the company won't hit its target unless fourth-quarter sales jump 26 percent or more sequentially, analyst Eric Buck of Brean Murray & Co. Inc. wrote in a research note this morning.

"We might be more comfortable if this guidance was based on rising deferred revenue or orders already on the books. However, deferred orders were down sequentially, and it appears that this guidance is based on the expectation of orders being received in the third and fourth quarters," Buck wrote.

In another research note, Jefferies & Co. Inc. analyst George Notter assigned Sonus to the "penalty box," noting "a number of red flags coming off the business right now."

Listing concerns related to margins, softer-than-expected first-half bookings, second-quarter revenue deferrals, and the company's call for an aggressive ramp in fourth-quarter revenues, Notter wrote, "In total, it feels like the business is under pressure."

Sonus could also feel some pain due to the resignation of its president and COO Bert Notini, who will be leaving to join New York-based private equity firm New Mountain Capital. As part of that move, Notini will assume the role of CEO at systems integration company Aptus Inc., which is part of the New Mountain portfolio.

Notini was hired in 2004 to improve Sonus's internal operations, and he also led the company's internal options review, which began in 2006. With that review complete, however, Sonus said that Notini's role within the company was no longer necessary, and it does not intend to refill the position. (See Sonus Extends Financial Review, Sonus Opens Options Probe, Sonus Catches Up, and Sonus Finally Files Financials.)

Noting that he doesn't believe "Notini's exit should be read as anything but a career move," Buck writes that the former COO's departure "is not an incremental positive for the company."

— Ryan Lawler, Reporter, Light Reading

trzwuip 12/5/2012 | 3:04:14 PM
re: Analysts Question Sonus Forecast The people that run this company have no business ethics at all. If they were bigger, there would be more attention to this. They rarely have reported on time in their history! This company should have sold when it was rumored they were offered $$ by Cisco and/or others. They give the industry a bad name (i.e. MCI / Worldcom and others)! Maybe to make the 4th quarter, they can ship a bunch of crap customers didn't order and then take returns in Q1 '08? Maybe ship some boxes of office supplies and call it a switch. There is nothing wrong with that if the customer can return it, right?!
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