Is Lucent Sounding Out Sonus?

When Sonus Networks Inc. (Nasdaq: SONS) postponed its eagerly awaited fourth-quarter and year-end earnings call this week, it set off a flurry of theories and rumors about what's going on (see Sonus Delays Q4 Results).

On Wednesday, about 15 minutes after the company's conference call was supposed to begin, Sonus cancelled the meeting, citing the need to complete a 2003 audit before revealing its numbers. That's had tongues wagging. Some say a partnership between Sonus and Lucent Technologies Inc. (NYSE: LU) is brewing and may have caused the delay of the conference call.

Adding some fuel to the rumor, Lucent CEO Pat Russo hinted during that company's earnings call this week that it has some exciting VOIP news in the works, but nothing it can talk about yet (see Russo's VOIP Spin Confounds).

Sonus officials declined to comment, noting that the company is in a quiet period and therefore cannot talk before its earnings.

Most analysts think that at its current price, Sonus is too expensive an acquisition. Sonus’s market capitalization right now is $2.12 billion and it's trading at 26.5 times trailing twelve month sales. For a company like Lucent that is trying to battle back to profitability, that's likely just too much.

”It’s doubtful Lucent would acquire them, as it's way over-priced, but a partnership would make a lot of sense from the product perspective," says a source familiar with both companies, who asked not to be identified. "It would get Lucent back into Verizon.”

Earlier this month, Verizon announced a major contract with Nortel Networks Corp. (NYSE/Toronto: NT), to replace its legacy Class 5 switches with next-generation softswitches (see Nortel Soars on Verizon VOIP Deal).

Lucent isn't out of the Verizon running altogether, though. Amongst the Nortel gear being replaced there is also a considerable chunk of old Lucent switches. Verizon went with Nortel because it wasn't convinced by Lucent’s next-generation products, but it's given Lucent 18 months, maximum, to come up with a better migration strategy or face being supplanted by another vendor (see Lucent Performs Softswitch U-Turn).

Besides Nortel then, analysts say the only other vendor with any clout in next-generation softswitching is Sonus. Verizon has already deployed Sonus’s GSX9000 gateway, its Insignus softswitch, and its Insight management system in its long-distance network (see Sonus Details Verizon Deal, Q2 Results ).

Sonus hasn’t discussed its business relationship with Verizon since the Nortel deal, but it would seem that the company has a clear opportunity to become the second vendor of choice in Verizon’s network.

On the notion of Lucent actually acquiring Sonus, Jon Arnold, VOIP analyst at Frost & Sullivan notes, “Both have mixed reputations, I’m not sure if putting them together would offset that or make them a stronger competitor to Nortel.”

Most people think a partnership between the two companies would make sense, particularly as they have already done some of the groundwork to integrate their technology. Back in June 1999 Sonus and Lucent joined forces to build an IP network for Frontier Communications, and Lucent just announced a VOIP deal with Qwest Communications International Inc. (NYSE: Q), which also uses Sonus gear (see Qwest Buys Lucent VOIP Kit, Lucent's VOIP Group Gets a Boost).

Sonus has a shopping list of customers, including Global Crossing Holdings Ltd., PointOne, Time Warner Cable, Z-Tel Technologies Inc. (Nasdaq: ZTEL), Interoute Telecommunications, NTT Communications Corp., UNI Telecom, Fusion Communications Corp., UNEFon (Mexico), and NuVox Communications, among others, but it has yet to land a real whopper of a deal with a major carrier, analysts say.

Regarding Sonus’s cancelled earnings announcement, people familiar with the company say there’s nothing sinister about it. “It’s more like orders not finished,” says one source.

Wall Street firms had estimated that Sonus would report quarterly revenues of $32 million, but recent reports from other telecom equipment makers has observers speculating that Sonus might blow past its numbers (see China, Wireless Save Lucent , Lucent Profits in Q1, Juniper Confidently Carries Q4, and What's Next? Cisco, of Course).

— Jo Maitland, Senior Editor, Light Reading