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'Good Grief!' Sonus Disappoints Again

Despite reportedly strong business, Sonus Networks Inc. (Nasdaq: SONS) announced yesterday that it will again disappoint with its quarterly earnings and will again report later than usual.

So continues Sonus's streak of confounding analysts not just with bad news, but bad news twisted with maddeningly quirky circumstances. In this case, business is reportedly booming, but the particulars of getting orders converted into revenues are keeping Sonus stuck in the mud.

Meanwhile, Sonus's stock continues a southward slide. Shares of the company fell $0.07 (1.88%) to $3.66 in normal trading on Monday. But after the news sank in, Sonus fell down 67 cents (18.3%) to $2.99 in after-hours trading.

For its first quarter, which ended March 31, Sonus now expects to report revenues of $30 million to $34 million, well short of the $41 million expected by analysts polled by Reuters Research. The figure also trails the $45 million reported by Sonus for its December quarter (see Sonus to Miss Q1 Targets, File Late and Sonus Promises, Promises).



"The revenue shortfall is due to schedule delays for the conversion of certain shipments to revenue and the late renewals of several annual maintenance contracts," CEO Hassan Ahmed said in a prepared statement.

As if to scuttle any speculation about the company's financial health, Sonus officials also pointed out the company has $311 million in cash reserves.

On a conference call with analysts, Sonus officials said business remains busy, with incoming orders totaling almost twice the amount of revenues. But it's taking longer to convert customer orders into revenues.

In one case, for example, a customer extended Sonus's required interoperability testing into the second quarter. Such delays are a byproduct of the enormous projects Sonus is involved in, officials said.

"The orders that are coming in are increasingly larger. They are increasingly more complex, they are more global, and therefore the revenue convergence is longer," said CFO Ellen Richstone.

A more irksome case involves one customer that's received Sonus equipment, installed the equipment, and paid Sonus for the equipment -- and yet isn't included in first-quarter revenues. The problem is that Sonus is negotiating a contract with this customer for a network expansion, and the rules of accounting require Sonus to delay other revenues from this customer -- even those unrelated to the expansion -- until the negotiations are done.

On the conference call, chairman and CEO Hassan Ahmed gave few details about this case, other than saying, "it's a domestic customer and one that we have a very good relationship with."

As if stuck in some Charlie Brown vortex of misery, Sonus continues to find ways to dampen and delay its earnings reports. Last quarter's antics included a delay in reported earnings because Sonus was still catching up with new requirements under the Sarbanes-Oxley law. That announcement prompted one analyst to ask aloud when Sonus would become a "normal" company (see Sonus Misses the Mark).

With the bad news outweighing the good in investors' eyes, Sonus's stock is toying with its 52-week low of $2.94.

Separately, and nearly the opposite of Sonus's news, ADC Telecommunications Inc. (Nasdaq: ADCT) last night said its revenues will be better than expected.

ADC will also undergo a 1-for-7 reverse split, the kind of move often taken to keep a stock out of delisting danger. In after-hours trading yesterday, ADC's stock was up 32 cents (17%) at $2.20.

— Craig Matsumoto, Senior Editor, Light Reading

allidia 12/5/2012 | 3:18:41 AM
re: 'Good Grief!' Sonus Disappoints Again they have booked around $150m in q4/q1... the revenue miss for q1 is partly to blame because they are negotiating a network expansion with an existing NA customer and because of acct. rules can't count any of the revenue that has already been shipped, installed, and paid for until after the negotiations. Basically, the revenue shortfall is just sliding into Q2. As for reporting q1 results May 9th that is not surprising as the new CFO has only had a few months to get a hold of the previous messed up structure. They got rid of the bad news Q1 shortfall and have set up the stock for all the good news ($150m in bookings - 2 q's) and by doing so if they land BT? it will be smooth sailing. Now the question is who is the North American customer negotiating their Network expansion?? AOL/Cingular/Q/LVLT ??? Get on it LR.
allidia 12/5/2012 | 3:18:39 AM
re: 'Good Grief!' Sonus Disappoints Again Actually none of the above. If you look closer at S/O you will find that revenue can't be recognized while in active negotiation regardless. SONS is breaking $4 today because their Q1 miss is minor compared to $150m bookings over last two Q's of which $60m is coming from historically weak Q1. Basically, SONS has been able to provide the long awaited guidance by giving Book to Bill ratio's. The B2B shows enormous strength and that's without Cingular and BT factored in. BT could be $50-$125m over the next few years alone... This CC fits the mold of when bad news is good.
paolo.franzoi 12/5/2012 | 3:18:39 AM
re: 'Good Grief!' Sonus Disappoints Again
LR covered all of that but who the customer is. Problem is that revenue recognition is a problem for Sonus and here it is again.

So, lets think about why previous shipments would be covered on these new negotiations:

- There is functionality to be developed and acceptance of the product will depend on that development.

- There is a retro-active price change as part of this deal.

- As part of new feature development a retrofit liability has been assumed for all the equipment that has shipped.

- Others???

Stuff that has shipped and been paid for is generally worthy of revenue recognition. I am actually more interested in which scheme Sonus is involved.

seven
paolo.franzoi 12/5/2012 | 3:18:38 AM
re: 'Good Grief!' Sonus Disappoints Again
No that is not correct and I have to work with Sarbanes-Oxley.

If you have an agreed price and there are no further requirements for the product, then it is revenue. Otherwise, NOBODY ever gets revenue because negotiations are always ongoing (ship dates are a negotiation) at some level. Just because one is paid does not mean that equipment can not be returned for cash as part of a deal.

seven
deauxfaux 12/5/2012 | 3:18:36 AM
re: 'Good Grief!' Sonus Disappoints Again Seven is right on this point. Something is being renegotiated, or there is a material deficiency in the shipment which created a contingent sale.
Management would never have upset the street over nothing. Hopefully, it is a small problem, but it doesn't smell like it.

Revenue can only be recognized "when the substantial burden of collection is relieved."
allidia 12/5/2012 | 3:18:35 AM
re: 'Good Grief!' Sonus Disappoints Again Apparently you didn't listen to the CC. They clearly state that some of the shortfall was because of accounting rules that prohibit the realization of revenue (some already paid for ) when neogiating an expansion of an existing contract. Clearly investors understand as the stock flew up over 10% today and on high volume.
They also said the revenue shortfall is all falling into Q2 and none was lost. BT win would be nice to keep the Momentum flowing.. If Sons has @$60m in Q1 bookings that is unheard of for such a historically weak quarter that one has to wonder who the customers are behind it... we know it isn't BT yet and Cingular is probably the NA wireless customer they are negotiating an expansion with so who is behind the $150m in bookings... How is NT doing at VZ anyways...
paolo.franzoi 12/5/2012 | 3:18:35 AM
re: 'Good Grief!' Sonus Disappoints Again
Allidia,

They can say what they want. BUT, the only reason that you can not recognize revenue for things shipped or paid for is that you may not receive payment. In fact, if you are likely to receive payment you MUST take revenue even if you don't want to.

Thems da rules....

So, why might they not get paid for things that they have already shipped and been paid for:

1 - Development work dependency

2 - Product acceptance dependency

3 - Retro-active reimbursement

Now, you can choose to believe us or not. We are not saying that they are lying. But to say that contract extensions necessarily mean you can not collect revenue is an outright lie.

seven

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