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Sonus Networks Inc. (Nasdaq: SONS)

Sonus Networks Inc. (SONS) provides voice infrastructure solutions for wireline and wireless service providers. Its products are infrastructure equipment and software that enable voice services to be delivered over Internet protocol (IP) packet-based networks and are built on the distributed, IP-based principles embraced by the IP Multimedia Subsystem (IMS) architecture. SONS solutions and services enable fixed, mobile and cable operators to gain session awareness and deliver multi-media capabilities essential to adding value and expanding their customer and subscriber base. With next-generation IP session control technology, the Company helps service providers, large or small, seamlessly migrate their networks to next-generation, service creating IP-powered infrastructures. In a 2008 independent study performed by Infonetics, in which service providers were asked to rate Alcatel-Lucent, Cisco, Ericsson, Huawei, Nokia Siemens, Nortel Networks and Sonus, the Company received the highest ratings for technology, product roadmap, security, management and price-to-performance.

Today, the Company’s advanced network technology carries over one billion minutes of IP-voice around the world every day—nearly 40% of all IP-voice traffic worldwide. SONS sells its products in the United States, Europe, the Middle East, Africa, Japan, and the Asia-Pacific. Its target customers include both traditional and emerging communications service providers, including long distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, international telephone companies and carriers that provide services to other carriers.

Founded in 1997, the Company is headquartered in Westford, Massachusetts.  At December 31, 2008, the Company had a total of 991 employees.

Source: Reuters.com, SEC Filings.

Financial Summary

The Company’s revenue for the second quarter of fiscal 2009 was $61.6 million, compared to $41.0 million in the first quarter of fiscal 2009 and revenue from continuing operations of $87.8 million for the second quarter of fiscal 2008. AT&T contributed approximately 40% of revenue. Total operating expenses for the second quarter were $34.8 million, down from $36.5 million in the first quarter and down from $45.9 million in the second quarter of last year, primarily reflecting cost reductions from the right-sizing and realignment actions the Company has taken. SONS’ net income on a GAAP basis was $4.4 million, or $0.02 per share, for the second quarter of 2009, compared to a loss of $16.2 million, or $0.06 per share, for the first quarter of 2009, and income from continuing operations of $3.3 million, or $0.01 per share, for the second quarter of 2008.

The Company ended the quarter with cash, cash equivalents, marketable securities and investments totaling $387.4 million. SONS’ operating activities provided $12.4 million of cash in the six months ended June 30, 2009. SONS’ investing activities provided $79.0 million of cash in the six months ended June 30, 2009, primarily comprised of $91.8 million of net sales and maturities of marketable securities and investments, partially offset by $9.5 million placed into escrow related to the agreement to settle the 2002 Securities Litigation and $3.4 million for purchases of in property and equipment. The escrow amount was released on July 16, 2009.

Looking forward, the Company expects revenue for 2009 to be substantially lower than the revenue realized in 2008. The 2009 gross margin percentage is expected to be within the range of 58% to 62%. Total operating expenses are expected to be in the range of $144 million to $153 million for the year. Based on the first half performance and current outlook, the Company’s management considers SONS will be able to report a cash balance above $350 million at year end. According to Reuters Estimates, analysts were expecting the Company to report revenues of $218 million for the same period.

Source: Yahoo! Finance, SEC Filings.

SONS’ shares were down sharply in August after the Company provided a disappointing outlook for the second half of the year. During the past two months, the stock trades around the $2 level. Over the last 52 weeks the stock has ranged from a low of $1.09 to a high of $2.50.

Analyst Consensus

Eight analysts polled by Thomson Reuters consider the “Hold” strategy for SONS.

Source: http://markets.ft.com/tearsheets/analysis.asp?s=sons

Investment Highlights

The Company has been recognized by independent market research firms as a worldwide market share leader in several key segments of the carrier-class packet voice infrastructure equipment market. SONS’ IP solutions enable mobile carriers to leverage their existing legacy networks while gradually migrating to an elegant Next-Generation Network (NGN) architecture. The world’s largest service providers are already moving to an NGN infrastructure, and many of them are choosing SONS to lead the way with its portfolio of IP-based routing, media gateway and border security solutions. Current customers include many of the world’s major service providers including: AT&T, BT Group, Carphone Warehouse, France Telecom, Global Crossing, KDDI, Level 3, Qwest, Softbank Corp., T-Systems Business Services, Verizon and XO Communications.

The Company recently grew its customer base with new customer wins in the United States and Asia. Thus, Cox Communications, the third largest cable television company in United States has selected a Sonus IP based network as part of its next generation network transformation; CITIC 1616 one of Hong Kong’s fastest growing voice network wholesalers connecting 350 operators in 60 countries has chosen the Company for its network migration; Next Gen, one of Japan’s largest network operators, has elected SONS to undertake nationwide deployment of its Trunking and Switching network; the Company was chosen to provide the IP Voice Network infrastructure to KDDI Global which expands KDDI’s rich in Asia, Europe, and the United States. In addition to this, SONS was recently selected to build the new infrastructure that will manage the growing volume of IP voice traffic on the network of HyperCube, premier provider of local and national tandem services to carriers across the United States.

In August, SONS announced a new product that provides advanced network performance analysis at the individual co-level and is based on one of the Company’s professional service offerings. Sonus NetScore™ enables customers to increase operational efficiencies, reduce infrastructure costs and maximize return on investment. This enables network operators to better manage fluctuating call volumes, identify specific issues to protect quality of service for their subscribers and help to justify additional capacity investment to meet business needs. This is the first of a new family of products in the Company’s networks which leveraged SONS’ many years of Voice over IP network design and deployment expertise.

The slowdown in consumer spending coupled with the lower ROI environment drove many of SONS’ customers to reallocate capital toward revenue generating activities. As a result, the Company started to restructure the business towards the end of 2008. In the three months ended March 31, 2009, the Company recorded restructuring expenses aggregating $2.0 million related to two headcount initiatives implemented as part of its efforts to right-size the business to align with market opportunities while managing costs to position SONS for profitable growth. Recently, the Company announced a restructuring initiative to reduce its workforce by approximately 93 people, or 10% of employees worldwide. This action brings the total expected restructuring charges for severance and related costs to approximately $3.4 million to $3.9 million on a pre-tax basis for restructuring actions initiated during 2009. The Company anticipates annual compensation-related cash savings of approximately $19.7 million to $21.6 million as a result of these reductions.

For the first time in its 23 years of forecasting for the information and communications technology industry, the Telecommunications Industry Association (TIA) is projecting a 3.1% decline in revenue for the overall global ICT market in 2009 due to global economic conditions. In 2008, the worldwide telecommunications industry revenues were estimated at $3.85 trillion. While revenue will remain weak in 2010, with a modest 1.2% increase, the longer-term outlook is much brighter. Globally, TIA projects a strong rebound for the ICT industry after 2010, citing a 6.4% revenue growth in 2011 and a 7.9% increase in 2012.

The VoIP market has grown dramatically since the early days of calls made from personal computers. According to eMarketer predictions, the number of VoIP users in the United States will climb to 32.6 million in 2010, equating to nearly 40% of all broadband households. According to AMI research, almost 20% of small businesses and 60% of medium-sized businesses are predicted to use VoIP by 2012. By 2011, In-Stat predicts the worldwide consumer VoIP market will total $44 billion.

Technical Analysis

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Source: http://stockcharts.com/h-sc/ui

SONS is trading above its 13-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

The MACD for SONS currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

The Company is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

SONS is traded with premium to peer P/S multiples.

The operating environment remains challenging but the Company reorganized and has made significant progress towards right-sizing its business to the market, reducing overall operating expenses and focusing its R&D resources toward projects that can generate future growth for SONS. The Company boosted its cash balance in recent quarters and has no long-term debt, which could help it take advantage of opportunities in the North American market and abroad. Recently, the Company won important new customers and engaged new partners. With the restructuring nearly complete, SONS has the stability and resources it needs to achieve its plan and it keeps all the chances that when the economy recovers, it will be a part of the recovery.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

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