Samsung Sings Sonus Song

Sonus Networks Inc. (Nasdaq: SONS) announced Tuesday it has formed a non-exclusive reseller agreement with Samsung Electronics Co. Ltd. (Korea: SEC), marking the softswitch vendor's latest move to build a presence in the wireless carrier market.

“A major part of our growth plan is to make a big play for wireless,” says Sonus chief marketing officer Steve Edwards. “We’re trying to do that through partnerships with such companies as Marconi and Motorola." (See Marconi & Sonus Team for Next-Gen and Vendors Unite For Mobile VOIP.)

Under the new agreement, Samsung will resell "branded" Sonus GSX9000 softswitches to wireless service providers globally. The agreement is distinct from the company's earlier one with Motorola, under which Sonus products are sold on an OEM basis, says Edwards.

But equities analysts familiar with the companies can't see the Samsung agreement having much immediate positive impact on Sonus’s fortunes.

“Sonus probably won’t see much near-term revenue from this, but it will build over time,” says analyst Todd Smith of America's Growth Capital.

“Its international sales have been less than 20 percent of [total] revenues, while 50 percent of carrier dollars are international, so it is partnering to get that international reach,” says Smith.

But how far will the agreement advance Sonus into an increasingly competitive space, where competitors Nortel Networks Ltd. (NYSE/Toronto: NT) and Ericsson AB (Nasdaq: ERICY), which have their own softswitch products, have an advantage in wireless experience, market share, and global reach?

Analysts say Samsung's wireless equipment business is concentrated in Asia, with a small presence in North America.

“They are already playing from a position of weakness in the wireless space," says Pacific Crest Securities Inc. analyst Aalok Shah. “Nortel and Ericsson are able to leverage more expertise in the space and are better able to configure solutions around their existing products.”

Sonus's greatest thrust into the wireless market so far has been its direct supplier relationship with AT&T Wireless Services Inc. (NYSE: AWE), analysts say. Sonus's Edwards says AT&T equipment sales have been contributing to the vendor's bottom line for the past year.

And in that same period, Sonus's fiscal health has taken a turn for the better. After a very rocky start to 2004 (see Sonus Drops a Bomb, Sonus Redeploys CFO, and SEC Steps Up Sonus Probe), the company has rallied to show solid year-over-year growth in successive quarters (see Sonus Reports Rising Q3 Revenues).

“AT&T has been one of Sonus’s biggest customers during the past years,” says analyst Joe Noel of Pacific Growth Equities Inc. “But while AT&T is big, the question is: To what extent will it slow down equipment buys as it integrates with Cingular?” (See Cingular Buys AT&T Wireless.)

Noel is quick to point out that his firm downgraded Sonus for that reason, and because of "severe downward pricing pressure in the Class 5 switch market." He notes that the Samsung agreement is just the latest in a string of Sonus attempts to penetrate the wireless space, and should not be seen as exceptional. “They have signed some deals, but they are longer term in nature,” he says.

Sonus stock rose from yesterday’s close of $5.49 to a high of $5.65 at midmorning Tuesday in reaction to the news, and later closed up 4 cents at $5.53.

Sonus will announce its fourth-quarter 2004 results on March 3.

— Mark Sullivan, Reporter, Light Reading

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