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Optical/IP

Sonus Opens Options Probe

Sonus Networks Inc. (Nasdaq: SONS) reported strong second quarter revenues Monday but declined to report its full quarterly results because of an internal review of its stock options grants. (See Sonus Reports Q2.)

The Chelmsford, Mass. VOIP equipment company said it had second quarter revenues of $64.4 million, compared with $58.1 million a year ago and $60 million in the first quarter. Analysts polled by Thomson First Call expected revenues of $59.4 million, and earnings of 2 cents a share.

Revenues for the first half of the year were up 36 percent from the same period last year, Sonus said. (See Sonus Touts Growth .)

Sonus said its cash, cash equivalents, marketable securities, and long-term investments at the end of the second quarter were $318.3 million. Accounts receivable increased $43.9 million in the quarter, the company said.

A Sonus spokeswoman said the stock options review is "voluntary" and was brought on by recent attention to the subject in the media. (See Backdating Blues.)

“Management is working with the audit committee, and we expect that will continue and we’ll work our way through the process,” Sonus CEO Hassan Ahmed told analysts Monday. "We got into it several days, a week ago, and now we’ve really got our foot on the gas to get it behind us.” Ahmed said Sonus has made about 5,000 individual employee options grants and is reviewing each one. (See Foundry, VeriSign in Stock Option Probes.)

Investors don't seem concerned about the partial numbers and the internal options review. Sonus stock was trading up $0.35 (8.57%) to $4.40 in late afternoon trading on Tuesday.

Of more concern to analysts is Sonus's customer mix, or lack thereof. Sonus’s top five customers represented 80 percent of its second quarter revenues, compared to 57 percent in the first quarter. Ahmed said the bulk of revenues are typically contributed by a small group of large accounts, but he pointed out that the small group is made up of different companies each quarter.

Sonus said Cingular Wireless was the only customer to contribute more than 10 percent of revenues this quarter. But Piper Jaffray & Co. analyst Troy Jensen said the Cingular business may have accounted for more than 40 percent of Sonus's revenue for the quarter. Jefferies & Co. Inc. analyst George Notter said the number could be as high as 50 percent.

Sonus said Monday that Cingular would be expanding the deployment of Sonus gear in its wireless network. (See Cingular Picks Sonus .)

Still, analysts seemed pleased with Sonus's progress. "We believe growing demand for VOIP products will continue to fuel solid top-line performance for Sonus over the next several quarters," Piper Jaffray's Jensen wrote in a research note.

Jefferies' Notter called the results "solid," but he remains cautious for several reasons. "Last night's solid earnings release does not change our concerns around customer concentration, volatility in quarterly results, and valuation." (See Sonus Looks to Buy & Get Bigger.) The only guidance investors got was a statement by Sonus CFO Ellen Richstone that revenues for the second half are expected to grow 10 percent from those in the first half.

Ahmed said the expanded Cingular business, and the fact that Motorola Inc. (NYSE: MOT) recently began reselling the Sonus GSX4000 switch, are the main bright points for the company right now. Sonus said it had 784 employees at the end of the second quarter, up from 761 at the end of first quarter.

— Mark Sullivan, Reporter, Light Reading

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