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Sonus Dips Into the Red

Sonus Networks Inc. (Nasdaq: SONS) kept analysts scratching their heads Monday, painting a rosy picture of its current and future prospects while reporting more disappointing results (see 'Good Grief!' Sonus Disappoints Again and Sonus Misses the Mark).

The Chelmsford, Mass.-based supplier of VOIP gear took a first-quarter loss of $3.7 million, or a penny per diluted share, on revenues of $33.6 million. In the year-ago quarter, the company reported a net gain of $3 million, or a penny a share, on revenues of $36.5 million (see Sonus Reports Q1).

According to estimates collated by Reuters, analysts had expected worse -- a loss of two cents per share on revenues of $32.2 million. But Sonus had already ratcheted down expectations, announcing April 18 that revenues would be in the range of $30 million to $34 million, well short of the $41 million the analysts had previously predicted (see Sonus to Miss Q1 Targets, File Late and Sonus Promises, Promises).

Revenues for the quarter ended March 31 were down 25 percent from the previous quarter’s $45 million, and gross margins slid 5.5 points to 64 percent (see Sonus Reports Q4, Full Year Results).

Overall, investors didn't like the news. Sonus stock was trading down 24 cents, more than 6 percent, at $3.60 in pre-market trading Tuesday morning.

Sonus is seen by much of the analyst community as an attractive and well-positioned player in a burgeoning VOIP infrastructure market, but one whose true value is not being reflected in its earnings numbers (see Infonetics: VOIP Gear Sales Soar).

"We achieved ... strong order activity, the expansion of our customer base, establishment of new global partnerships and the introduction of new software for the ISP market,” says Sonus CEO Hassan Ahmed in a statement.

“We are, of course, disappointed that our progress is not reflected in our revenue result this quarter," Ahmad adds.

Sonus says it signed agreements with four new customers in North America and Europe during the quarter, and had follow-on sales with Global Crossing Holdings Ltd. (Nasdaq: GLBC) , NuVox Communications, and XO Communications Inc. (OTC: XOXO). (See AOL VOIP: You've Got Apathy.)

Sonus has had its reporting problems in the past (see Sonus to Miss Q1 Targets, File Late and Nasdaq to Delist Sonus). But the first-quarter results are reflective of an extremely conservative approach to reporting revenues.

“You see all this activity going on with all the bookings and the deferred revenue, but not as much is coming out [in the results] as we would like to see,” says Susquehanna Financial Group analyst Joe Chiasson.

Chiasson believes Sonus sets up its customer contracts such that it can’t or won’t recognize the revenue from those arrangements until all obligations are met, like future software upgrades. A year or two might pass before any of the revenue shows up in the books, he says.

“It just seems unduly complicated,” Chiasson says. “Part of it I know is related to their accounting standards, but part of it I think is unique to them in the way they set up their contractual arrangements.”

Indeed, CFO Ellen Richstone told analysts Monday that $16.8 million in orders were shipped and billed during the first quarter, yet were not reported as revenue.

On another front, COO Bert Notini told analysts that Sonus’s sales partners are generating significant revenue, while declining to quantify the portion of revenue this group is contributing (see Samsung Sings Sonus Song).

Of those partnerships, Notini says, Motorola Inc. (NYSE: MOT) is “the most developed.”

“We’re building a number of networks with Motorola and we are also involved in a number of trials with them as carriers look at adopting VOIP technology,” Notini says.

Statements like those inspire hope for strong top line numbers in quarters to come, but that’s about all investors and analysts got on Monday –- hope. Sonus declined to provide any guidance for the second quarter.

“We’re not putting out any specific metrics,” Ahmed told analysts. “When we feel that those metrics are stable and predictable we will begin to provide them.”

— Mark Sullivan, Reporter, Light Reading

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