VoIP Systems

Slowdown Crunches Sonus

"We had a challenging quarter and are disappointed with our results."
– Richard Nottenburg, CEO.

That pretty much sums up the third quarter for VOIP gear vendor Sonus Networks Inc. (Nasdaq: SONS), which saw its revenues drop by 18 percent year-on-year and 29 percent sequentially, to $62.2 million.

And the slowdown isn't a short-term blip. Sonus is expecting year-on-year sales to be way down in the current quarter.

The vendor had warned a month ago that its third quarter numbers were going to be rough. (See As Sonus Shrinks, AudioCodes Stays Firm.) But the decline was even steeper than expected. Following the early October warning, analysts revised their third quarter revenues forecast to a consensus of $69.6 million from $88.5 million, but even that reduced figure was too high.

Sonus reported a net loss of $19.6 million, or 7 cents per share, though discounting one-time costs, including "litigation settlements" of $19 million, the company reported a non-GAAP net loss of $1.9 million, or 1 cent per share, slightly better than Wall Street's average forecast.

The company is bracing itself for a weak fourth quarter, too. Although CFO Rick Gaynor said he couldn't give any specific numbers, he said revenues for the final three months of 2008 are on course to be "meaningfully less" than the $97.1 million reported a year earlier.

Sonus's share price fell by 16 cents, 8 percent, to $1.86 Thursday morning.

September was the crunch month for the vendor, as purchase orders dried up, though Nottenburg stressed that Sonus has experienced no significant order cancellations or delays.

He did, though, say the company needs to run more efficiently and with a lower cost base. "We will rightsize the business to match the market opportunity," said the CEO, who noted that carriers have already cut their capex budgets.

While exact cost reduction plans are still being finalized, Nottenburg said the company intends to rely more on lower-cost geographies for R&D -- it will invest more in its Bangalore development center in India in 2009 -- and place a greater reliance on partnerships with major equipment vendors that have large service organizations to address new sales opportunities in emerging markets. (See Sonus Expands in India.)

He also stressed that the company has "a strong financial position that means we can weather the current economic storm." Sonus has cash and short-term assets of $404 million, including $113 million in cash and cash equivalents, and no debt. Nottenburg even noted that Sonus has the "ability to make opportunistic investments."

The company's next M&A activity, though, will be a sale, not an acquisition. Sonus announced today that it plans to sell its Zynetix mobile softswitch subsidiary, and is already in talks to offload the unit. Sonus acquired Zynetix for $13 million in April 2007, having announced the purchase a month earlier. (See Sonus Buys Zynetix for $13M.)

Nottenburg noted that Zynetix was acquired so that Sonus could get its hands on the company's intellectual property, which it has used to build its mobilEdge Wireless Access Node launched earlier this year. What Sonus is selling is Zynetix's legacy GSM mobile softswitch, which can be installed on cruise ships and in other remote areas to provide local voice connectivity.

— Ray Le Maistre, International News Editor, Light Reading

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