VoIP Systems

Sonus Shows Promise in Q4

Softswitching company Sonus Networks Inc. (Nasdaq: SONS) showed solid revenue numbers in the fourth quarter of 2005 driven by strengthening sales to European and Japanese operators. (See Sonus Reports Q4.)

The company earned a fourth-quarter profit of $5 million, or two cents a share, on revenues of $57.2 million, compared with earnings of $6.3 million, or three cents a share, on revenues of $45.1 million during the year-ago quarter.

The numbers beat analysts' expectations; they had the company earning one cent a share and revenues of $50.1 million, according to Thomson. This is despite the fact that Sonus's net profits were down 17.8 percent from the year-ago quarter. (See Sonus: Party Like It's 2002.)

The numbers were also a clear improvement over the previous quarter when Sonus showed a net loss of $2.7 million, or a penny a share, on revenues of $45.7 million. (See Sonus Misses in Q3.)

“The business is looking stronger for 2006,” says Sanders Morris Harris analyst Natarajan Subrahmanyan. “They’ve got a couple of international deals, they have announced Japan Telecom Co. Ltd. , and I hear that they are starting to get some traction in Europe.” (See Sonus Wins at Japan Telecom.)

Sonus CEO Hassan Ahmed acknowledged some progress in Europe and Japan, and believes Sonus softswitches are gaining hold in North American networks. Ahmed told analysts Monday that he believes the company leads the core softswitching business in North America, and will eventually begin to dominate sales of Class 5 switches as operators convert their networks to IP. (See Sonus Shares Latest Thrill .)

Twice during a call with analysts Monday Sonus officials cited industry research pointing to increasing migration to VOIP infrastructure by operators. “VOIP is starting to become accepted around the world, and as this happens [Sonus's] type of technology will eventually underpin all networks,” Ahmed said.

Comforting words for Sonus investors perhaps, but the company's quarter-to-quarter performance is plagued by inconsistent sales numbers and unpredictable revenue recognition patterns. (See Sonus Promises, Promises.)

“Sonus’s quarterly results seem to be more driven by revenue reporting issues than by bookings in the quarter,” says Susquehanna Financial Group analyst Joe Chiasson. “This is due to the long sales cycles, but also to the way they structure their contracts.”

And analysts don't expect the problem to go away any time soon. "In terms of the size of the opportunities, how soon they materialize and when they hit the revenue statement I think we are still a little bit in flux,” Sanders' Subrahmanyan says.

As for Sonus’s full year 2005 results, revenue was higher but the company kept less of it. Sonus’s 2005 revenues grew 14 percent to $194.6 million, compared with $170.7 million for fiscal year 2004. Profit for the year came in at only $8.4 million or three cents a share, compared to profit of $24.5 million or ten cents a share in 2004.

Sonus officials say higher operational expenses such as R&D and personnel costs ate into the company’s margins during 2005.

Another red flag for investors may be Sonus's customer mix. Richstone said Sonus’s top five customers represented 69 percent of revenue for the fourth quarter, up from 61 percent in the third quarter. Cingular Wireless was the only customer that contributed more than ten percent of Sonus's revenue during 2005, Richstone said. (See Is Cingular Cold on Sonus?.)

Sonus gave only vague guidance to analysts for the first quarter of 2006. Sonus CFO Ellen Richstone said numbers for the quarter will be modestly below fourth-quarter revenue numbers, but higher than first-quarter 2004 numbers.

Sonus shares were trading down $0.15 (2.77%) to $5.17 in after-hours trading on Monday. CEO Ahmed is scheduled to ring the opening bell at the Nasdaq Tuesday morning.

— Mark Sullivan, Reporter, Light Reading

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