Optical/IP Networks

Sonus Soothes Numbers Nerves

Don't hold your breath, but indications are that the financial restatement process at Sonus Networks Inc. (Nasdaq: SONSE) will not result in a major accounting scandal (see Sonus Completes Financial Review). And the softswitch vendor's shares are bouncing back.

The vendor has refiled its financial reports for 2001, 2002, and the first three quarters of 2003 with the Securities and Exchange Commission (SEC), and "expects" to file its restated 2003 annual report (including the fourth-quarter form) and the restated first quarter of 2004 "within the next week," Sonus CEO Hassan Ahmed told a conference call after the markets closed Monday.

Relieved that the accounting mess could soon be resolved and that it involves the timing of revenue recognition rather than something more serious (such as, say, missing cash), investors bid Sonus shares up 65 cents, nearly 16 percent, to $4.75, in pre-market trading today. Its 12-month high is $10, and the low $3.09. All of these numbers are a far cry from the lofty days of 2000 and early 2001 (see Sonus Networks Inc. (SONS)).

Ahmed said the "majority of the revenue recognition issues [center on] one customer and impact the entire revenue recognition period," though the identity of that customer wasn't revealed. The revenue adjustments relate to software updates and involve the deferral of revenues that are now recognized in later periods than previously stated. The company noted that there are some "complicated accounting rules" related to software upgrades and the issue of ongoing systems maintenance.

Sonus also noted that "other material restatements include adjustments to purchase accounting, impairments, accruals and deferred compensation." The company didn't expand on these matters, other than to say that its accruals (provisions made where payments have not yet been completed) would be adjusted downward, and that a non-cash adjustment would be made related to the acquisition of Telecom Technologies Inc., which was completed in January 2001.

Ahmed said further details would be provided at a later conference call once all the restatements were filed.

The Sonus rumpus began in January and has seen the dismissal of some members of the vendor's finance team and the announcement of a formal investigation by the SEC (see SEC Steps Up Sonus Probe, Sonus Drops a Bomb, and Sonus Delays Q4 Results). Sonus confirmed that one of the staff dismissed was the company's financial controller and that it was continuing its search for a new CFO (see Sonus Redeploys CFO).

The company is also asking the Nasdaq Listing Qualifications Panel for more time to regain compliance with the exchange's filing requirements. The panel had previously set July 19 as the date by which Sonus should file its 2003 and first-quarter 2004 forms.

If it gets the expected extension from Nasdaq and files its second-quarter 2004 results on time on August 9, then the company could come out of this episode largely unscathed, and with a tighter financial reporting structure. But will it name the customer at the center of the whole episode?

The company is saying nothing at the moment and doesn't indicate whether that customer's identity will be revealed once all the restatements are complete. Sonus has a number of large carriers using its softswitch technology, including AT&T Corp. (NYSE: T), BellSouth Corp. (NYSE: BLS), China Netcom Corp. Ltd., Global Crossing Holdings Ltd. (Nasdaq: GLBC), Level 3 Communications Inc. (Nasdaq: LVLT), NTT Communications Corp., Qwest Communications International Inc. (NYSE: Q), Time Warner Telecom Inc. (Nasdaq: TWTC), and Verizon Communications Inc. (NYSE: VZ).

Instead, the management team is keener to talk up the company's recent successes, including what Ahmed describes as "important new business" that is being generated by the partnership with Motorola Inc. (NYSE: MOT) (see Motorola Pairs With Sonus, Sonus Solutions Chosen by Qwest, Volo Picks Sonus for VOIP, and Interoute Rides Europe's VOIP Wave ).

Sonus would also not be drawn into commenting on the potential market impact that the recent Lucent Technologies Inc. (NYSE: LU) softswitch acquisition announcement will have (see Lucent Buys Softswitch Vendor Telica). Sonus says it always expected the softswitch market to be dominated by about three companies, and that at least two of those would likely be traditional voice switch vendors. "Lucent has always been treated as a key competitor," states one senior executive.

— Ray Le Maistre, International News Editor, Light Reading

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