Sonus Slumps on Slower Growth Outlook
Announcing slightly better-than-expected second-quarter results, with revenues at $87.9 million, recently appointed Sonus CEO Richard Nottenburg said the 20 percent growth in full-year revenues anticipated for 2008, much of which was to come in the second half of the year, would now be 10.5 percent at best. (See Ex-Moto CTO Tabbed to Run Sonus.)
Revenues grew by 10.5 percent during the first half of the year to $161.9 million, compared with $146.6 million in 2007, but now the expected second-half growth surge "is not expected to exceed the 10.5 percent growth we experienced in the first half," noted Nottenburg.
"Like others, we're sensitive to the postponement of capex by our customers, and we see downward pressure from our prior outlook on revenue for the third quarter and for the full year," stated the CEO, according to a transcript of the company's earnings conference call by Seeking Alpha.
A 10.5 percent year-on-year growth would put second-half revenues at $192 million, up from $173.7 million in 2007, but a very long way short of the near $220 million that analysts had anticipated (based on the growth rate announced earlier this year).
The news, issued after the markets closed Monday, hit the vendor's share price in early Tuesday trading, wiping $0.90 off the share price in the first hour of trading, a 21.5 percent slump that took the stock to $3.29.
Analysts are concerned that the slower-than-expected growth might be down to cutbacks at AT&T Inc. (NYSE: T), which is Sonus's biggest customer, but Nottenburg noted that the new outlook wasn't down to any one customer, and was linked to general industry trends. (See Report: AT&T Slowing on U-verse.)
Not everyone's convinced, though. In a research note issued Tuesday, Jefferies & Company Inc. analyst George Notter stated of the revised growth outlook: "This could simply be an example of a new CEO setting conservative expectations in a soft macroeconomic environment. However, a more negative reading would be that the company's Class 4 tandem switch replacement project at AT&T is finally slowing down."
Any reduced spending at AT&T will hit Sonus hard, as the U.S. carrier giant is responsible for such a major chunk of the VOIP vendor's sales. AT&T generated 40 percent, or $35.2 million, of Sonus revenues in the second quarter. It was one of two 10 percent customers, along (in the second quarter) with Japan's KDDI Corp. , so together those two carriers were responsible for at least half of Sonus's revenues.
That shows how reliant Sonus still is on just a few customers. Despite announcing that it derived revenue from 82 customers in its second quarter (up from 70 a year earlier), 69 percent of its second quarter revenues came from just five customers, up from 65 percent a year earlier.
The vendor's sales are also geographically concentrated: 80 percent of its second-quarter revenues came from U.S. customers, and that'll be a worry as North American carriers tighten up their capex plans.
Nottenburg told analysts on the late Monday earnings conference call that one of his priorities is to "expand the number of Tier 1 anchor tenants in our customer base" to broaden the company's revenue sources, though that is surely the aim of every vendor in the industry.
The company does have one Tier 1 on the books that's not yet contributing to the top and bottom lines in the form of BT Group plc (NYSE: BT; London: BTA), though that business, won late in 2007, is due to start appearing in the earnings reports in the coming quarters. (See Sonus Fills BT's IMS Hole and Sonus Gets BT 21CN Win.)
The CEO noted that BT is just one of a number of carriers in the EMEA (Europe, Middle East, and Africa) region that "drove a substantial increase in first-half bookings year-on-year," with Colt Technology Services Group Ltd and Spanish cable operator PTV Telecom among other new customers. (See Colt Unveils NGN Vendors.)
So is there any chance that Sonus might look to expand its customer base through acquisitions? Nottenburg said his current focus is on operational issues, and that any M&A activity would be "very opportunistic."
Sonus has already made one small acquisition this year, buying OSS vendor Atreus Systems Inc. for around $5 million. (See Sonus Buys OSS Firm.)
Nottenburg has other things on his mind, though, as Sonus is under pressure from one of its main investors, Legatum Capital, which believes poor management has stunted the vendor's share price growth potential. (See Investor Letter Takes Swipe at Sonus and Prepare for Sonus Scrap.)
On the conference call Nottenburg would say only that "constructive" talks were underway with Legatum, which, along with other Sonus investors, will be concerned about today's share price slump.
— Ray Le Maistre, International News Editor, Light Reading