Stock Watch: Sonus Networks

In an earnings season fraught with disappointment, Sonus Networks Inc. (Nasdaq: SONS) delivered solid results when it reported Q1 returns on Tuesday. The softswitch provider exceeded consensus revenue forecasts and raised guidance for the remainder of the year.

In the past week, Sonus shares have rebounded 50 percent from their low of $12.88 to close Thursday at $19.91.

How can Sonus flourish in the midst of a downturn in carrier capital spending? Simply put, the next-generation VOIP (voice over IP) market continues to see strong spending patterns. Due to increased competition, carriers need to operate a low-cost voice network that enables them to replicate their current architectures with new packet-based transport systems.

Sonus’s products are compatible with legacy networks and offer cost savings by enabling carriers to replace expensive Class 5 voice switches with a packet-based softswitch/gateway combination. In turn, this lower-cost alternative takes up less space and makes line provisioning easier with greater software functionality. The trend toward softswitch deployment will play a key role in reshaping voice networks in coming years, thereby giving the voice infrastructure market solid growth prospects.

Back to the important developments from Sonus’s Q1 earnings report. As Lehman Brothers analyst Steve Levy points out in a research note, “The fundamentals of the business remain healthy as Sonus sells equipment to large service providers that enables cost reduction and improved operations.” Levy remains very optimistic about the next-generation voice switching market, as well as the outlook for Sonus. He maintains a Strong Buy rating and $60 price target on Sonus shares.

Sonus added 11 new customers during the quarter. The company announced a major contract with Qwest Communications International Corp. (NYSE: Q) to provide packet voice technology for deployment in Qwest’s all-optical IP network. In a multiyear deal, Qwest will use the GSX9000 Open Services Switch, the IntelligentIP Softswitch, the PSX 6000 softswitch, and the SGX2000 SS7 Signaling Gateway. A deal of this magnitude helps to validate the legitimacy of the softswitch movement along with the need for carriers to packetize voice traffic.

During the quarter, Sonus signed a deal with Time Warner Telecom Inc. (Nasdaq: TWTC) to augment the carrier’s Class 5 circuit switches and offload Internet traffic from its voice network. The company indicated that Time Warner is running live traffic over its Sonus-based infrastructure, and has indicated that it will look to expand this relationship to serve additional cities.

On its quarterly conference call, Sonus lifted its revenue guidance for 2001 to $180-200 million from $170-190 million. A greater percentage of software-based products is expected to push gross margins up towards 57 or 58 percent in 2001 and should help the company achieve profitability by the end of the year.

— Christopher P. Bulkey, special to Light Reading http://www.lightreading.com