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VoIP Systems

Vonage Confirms Sonus Deployment

A year after VOIP equipment vendor Sonus Networks Inc. (Nasdaq: SONS) was linked with an engagement at voice-over-broadband pioneer Vonage Holdings Corp. (NYSE: VG), the companies have officially announced their relationship. (See Vonage Uses Sonus Gear).

Vonage was among a number of service providers linked to new Sonus business a year ago. (See Sonus Sets for a Critical Q1 and Time Warner Talk Fuels Sonus.)

Now the deployment is official, though message board gossip that an announcement was imminent had already given the vendor's stock a 10 percent boost on Tuesday.

That trend continued in pre-market trading Wednesday morning, when Sonus stock rose a further 16 cents, or 4 percent, to $4.27.

No financial terms were given by either party. Vonage has already deployed a range of Sonus equipment -- the GSX9000 media gateway and softswitch, the PSX policy and call routing server, the SGX signaling gateway, and the Sonus Insight management software -- in New York and Los Angeles, and plans to deploy the kit elsewhere in the U.S. as it expands. Sonus says its gear hasn't yet been deployed by Vonage in Canada or the U.K.

Although Vonage has been coy about the technology it has used to date, it is believed to have engineered its initial VOIP systems in-house, based on Cisco Systems Inc. (Nasdaq: CSCO) Call Manager technology.

The VOIP service provider, which recently raised $250 million as talk circulates about a potential acquisition or IPO, currently has more than 1 million customers -- the vast majority in the U.S. (See Vonage Raises Another $250M, Vonage Selects IPO Bankers, and Sources: Vonage Is Eyeing the Exits.)

The news gives Sonus a positive start to the year following a rollercoaster 2005, during which it landed some new deals but missed out on the major RBOC action, where Lucent Technologies Inc. (NYSE: LU) won the initial IMS (IP Multimedia Subsystem) skirmishes. (See Sonus Lands T-Systems Deal, Earthlink Joins VOIP Parade, Sonus, AOL Team On IMS , Lucent Lands BellSouth IMS Deal, and Is Cingular Cold on Sonus?.) It also continued to frustrate investors and analysts with its unpredictable financials, though it did at least see an investigation by the Securities and Exchange Commission (SEC) . (See Sonus Misses in Q3, Sonus Shares Latest Thrill , 'Good Grief!' Sonus Disappoints Again, and Sonus Cleared by SEC, Stock Jumps.)

The result was that investors lost some faith in Sonus, despite the ongoing VOIP revolution. On January 4, 2005, the vendor's stock stood at $5.72, nearly 40 percent higher than Tuesday's closing price.

Some analysts can see the upside. In a research note issued in mid-December 2005, Citigroup analyst Alex Henderson noted that Sonus's share price has been weak "due to a disappointing September quarter earnings release, and the announcement of several IMS contract wins by Lucent."

In addition, Henderson noted that the vendor's "relatively small customer base renders it vulnerable to wild swings in its quarter to quarter top-line performance. As a result, we urge investors to focus on the company's long term prospects," which the analyst believes to be strong. "We think the stock is significantly undervalued" at its current level. "As a result, we are reiterating our Buy rating on Sonus, and our $7.10 target price."

— Ray Le Maistre, International News Editor, Light Reading

DPD 12/5/2012 | 4:10:13 AM
re: Vonage Confirms Sonus Deployment If they weren't acquired when their stock was at $0.27, then I don't seen them getting acquired now especially seeing all the major vendors already have softswitches. The primary seeker would've been Cisco, but they've since got their softswitch working.

To go to the next level Sonus needs a true Class 5 VoIP switch that is applicable in both greenfield and legacy applications. No matter how they paint it their product is still a Class 4 tandem. That's why they primarily win "parasitic" applications like Vonage (a nice win, but it's not a RBOC/MSO). And in the end only service providers offering a quadruple play will survive with margins that interest the Street.

Verizon, a long time Sonus customer, announced in January 2004 that they will eventually replace their circuit infrastructure with packet using Nortel (http://newscenter.verizon.com/.... That was interesting seeing Nortel didn't have a Class 5 VoIP switch either (not sure where they are now). Verizon's message was Sonus doesn't have the means to supply a Class 5 switch through either development or acquisition.

A Bold Prediction (pun intended)
I think Sonus is a good target to be taken private (remember Enterasys?). Sarbanes-Oxley is killing small & mid-caps, so until it's re-written you will see more and more private investment firms buying out profitable companies with $1B and less market caps.

Sonus is profitable and have decent margins (accoring to their latest financial docs on their website). Their current cap is about $1B, they have ~$400M in cash & cash equivs, so a net leveraged buyout would be around $500M-$600M. Their future is also bright. They are kicking butt in Asia. To me they seem like a prime target for a private investment firm.
digits 12/5/2012 | 4:10:13 AM
re: Vonage Confirms Sonus Deployment Is SOnus big enough to survive on its own? Or will it need to get involved in m&A action, either as prey or predator?
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