Sonus Misses the Mark

The saga of Sonus Networks Inc. (Nasdaq: SONS) continued yesterday, as the company filed only a partial earnings report -- and one that showed revenues declining from the previous quarter at that.

The good news is Sonus's bookings hit an all-time company record during the fourth quarter, which ended Dec. 31. "We won substantial new business in the fourth quarter that we expect to tell you about in 2005," Sonus chairman and CEO Hassan Ahmed said on a conference call with analysts yesterday.

Investors weren't cheered, though -- Sonus shares plunged $1.01 (18 percent) to $4.50 in after-hours trading.

The problem was that today's partial filing predicts fourth-quarter revenues of $43 million to $46 million and earnings per share of 2 or 3 cents (see Sonus Reports Preliminary Q4). That's short of analysts' expectations of $49.9 million revenues and earnings of 2 cents per share, as tabulated by Reuters Research.

Worse, the numbers represent a revenue drop from the third quarter of 2004, when Sonus reported revenues of $46.8 million and net income of $10.3 million, or 4 cents per share.

Sonus is holding back the full earnings report until it publishes its Form 10-K with the SEC. The company wants to wait for the accompanying audit to be completed, "in light of previously reported material weaknesses in [the] internal control over financial reporting" according to a Sonus statement.

It's a tough start for a year that was supposed to mark Sonus's redemption. The company had gotten caught up in its financial restatements and was looking forward to a year of increased carrier spending (see Sonus: Whew! and Sonus Sets for a Critical Q1).

Irritated analysts noted on Sonus's conference call that this latest delay came after waiting two months past the quarter's end to hear any earnings news. Moreover, Sonus's third-quarter earnings were reported without a hitch, seemingly indicating that the era of delays and restatements was ending.

"At what point do you become a normal company?" analyst Paul Silverstein, of Credit Suisse First Boston Corp., asked Sonus.

Regarding the delay, Sonus officials said they're being conservative with the fourth quarter because year-end reporting carries requirements that other quarters don't. Sonus is also slowed by the adjustments needed to comply with Section 404 of the Sarbanes-Oxley law -- and, as executives had told analysts earlier, the company got a late start in that transition because so much of last year was spent restating 2003 earnings (see Sonus: Not out of the Woods Yet).

Section 404 of Sarbanes-Oxley refers to a set of controls public companies must exert over any internal processes that touch financial reporting. The law requires management to make a report at the end of every year detailing those processes, and the report must be attested to by an external auditor. Sonus is just one of more than 500 public companies that have now reported difficulty complying with Sarbanes-Oxley to the Securities and Exchange Commission (SEC), according to The Wall Street Journal.

On a brighter note, Sonus announced that its coffers contained an unprecedented $313 million in cash and equivalents at the end of 2004. “That’s very positive,” says Janco Partners Inc. analyst Eric Buck. “My read is that the business is fine. These are shortfalls in internal function –- it isn’t fraud -- it’s misfeasance not malfeasance.”

As for those "record" orders, Sonus officials warned that the associated revenues aren't just around the corner. "Some of these large customer deployments play themselves out over a period of time," Ahmed said.

But he repeatedly stressed that Sonus's fourth quarter was glorious. "This particular Q4 represents a growth in our wins and our customer base and really in the diversification of our customers in and outside of the United States," he said.

— Craig Matsumoto, Senior Editor, and Mark Sullivan, Reporter, Light Reading