Optical/IP Networks

Sonus Sets for a Critical Q1

Softswitch vendor Sonus Networks Inc. (Nasdaq: SONS) is heading for a critical few months that could define its life as an independent company.

The firm wants to put its 2004 troubles behind it and could start the year with a bang or two (see Sonus: Whew!).

Why? Carriers are due to increase their capex budgets in 2005, and sales of VOIP gear are on the rise, with Sonus figuring prominently. (See Insider Sees 'Calm' Capex Growth, Carrier VOIP Equipment Rises 51%, Carrier VOIP Equipment Rises 69%, and Sonus Boasts Top Rankings.)

In addition, there are market expectations that Sonus could pick up a significant new customer in voice-over-broadband upstart Vonage Holdings Corp., and also pin down some 21st Century Network business from BT Group plc (NYSE: BT; London: BTA) via its new partnership with Marconi Corp. plc (Nasdaq: MRCIY; London: MONI). (See Marconi & Sonus Team for Next-Gen and HR Unties Sonus/Marconi Tie-Up.)

But there's nothing yet in the bag. Though observers believe Marconi is almost sure to figure quite prominently in the British carrier's plans, BT has yet to announce any hardware contracts for its planned $19 billion network. And neither Sonus nor Vonage would comment on any planned deal.

And other factors are weighing on the minds of the analysts at Pacific Growth Equities Inc., who have concerns about Sonus's near-term potential and believe its stock has attracted an "excessive" valuation.

In a recently issued research note, the analysts wrote that any deal with Vonage would be "small relative to expectations," and that limited uptake of the CallVantage VOIP service offered by major Sonus customer AT&T Corp. (NYSE: T) will likely lead to limited opportunities for additional orders in the near future.

The Pacific Growth team also has concerns about price and gross margin pressures, the potential for order delays, and increasing operational costs at the vendor.

In fact, they believe that AT&T and Vonage between them will install only an additional 800,000 lines in 2005, and will drive very hard bargains with their suppliers. As a result, this expansion could translate into sales for Sonus of between $16 million and $20 million, lower than investors may be hoping for.

"We believe the majority of Sonus’ shareholders are under the impression this revenue opportunity is larger than we have estimated here," write the analysts.

They're also worried about how reliant Sonus is on a small number of customers. The analysts say that, jointly, Global Crossing Holdings Ltd. (Nasdaq: GLBC) and Qwest Communications International Inc. (NYSE: Q) accounted for about 65 percent of the vendor's $46.8 million revenues in the quarter to September 30 (see Sonus Reports Rising Q3 Revenues).

That shows an increasing reliance on a smaller number of key customers, as, in the previous quarter, Sonus derived about half of its sales from three customers -- AT&T, Global Crossing, and Qwest. "We believe this high level of customer concentration significantly adds to the overall level of risk involved in holding these [Sonus] shares," write the analysts.

That sort of analysis has put a downwards pressure on Sonus's share price of late. It began December at $6.59, but sank to close at $5.19 on December 20. It closed a little healthier on December 23, however, at $5.58, giving it a market capitalization of $1.4 billion.

— Ray Le Maistre, International News Editor, Light Reading

COMMENTS Add Comment
seabis 12/5/2012 | 3:31:14 AM
re: Sonus Sets for a Critical Q1 what's K+C and when is it on?
allidia 12/5/2012 | 3:31:14 AM
re: Sonus Sets for a Critical Q1 SONS gear in 2004. I'd say that is a significant milestone for VOIP and a clear indicator of the industry leader's strength. I'll be watching Hassan tonight on K+C. Maybe Pac Growth should to.
allidia 12/5/2012 | 3:31:13 AM
re: Sonus Sets for a Critical Q1 Here' the link...

allidia 12/5/2012 | 3:31:13 AM
re: Sonus Sets for a Critical Q1 Kudlow and Cramer is on CNBC 5PM est. Times may differ depending where you live. www.cnbc.com
allidia 12/5/2012 | 12:57:55 AM
re: Sonus Sets for a Critical Q1 grapes because of their miserable track record with SONS. Probably got burnt on the delisting. Funny how they don't mention the MOT OEM or China Putian OEM deal's. Or how about competitor Lucent's early failure with Telica by having to team with AUDC at HOT. Vonage is small 300,000 users vs. Comcast 250,000? Has a CompUSA distribution deal combined with aggressive marketing and is a great buy for MSFT or AOL...
Global Crossing? just raised $404m...
Qwest just entered 150 new markets...
AT+T CallVantage is a joke?...
Oh and what about BT's $19B 21CN Deployment with vendor announcements expected in the next 2-3 weeks and SONS/Marconi partnership..
SONS is profitable with $300m in cash and would be sold for $10/sh if the LU/Telica deal is used for valuation purposes.

What Rock does Pac Growth live under... Do they have an Agenda. With all this said you would expect them to have a Sell and low target... If I'm correct he has a Hold and $6 target... What?
P-ON 12/5/2012 | 12:57:51 AM
re: Sonus Sets for a Critical Q1 Pacific Growth is one of the most biased sellside firms around. They are either hyper positive or constantly negative no matter what the evidence of the contrary there would be.

It's weird that LR would put out this article now (2 weeks after the Pacific Growth note). Maybe they are onto something.
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