SONS

Sonus Networks, Inc. (SONS)

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Sonus Networks (SONS)

Q4 2012 Earnings Call

February 28, 2013 4:30 pm ET

Executives

Patti Leahy - Vice President of Investor Relations

Raymond P. Dolan - Chief Executive Officer, President, Director and Member of Corporate Development & Investment Committee

Maurice L. Castonguay - Chief Financial Officer, Senior Vice President and Principal Accounting Officer

Todd A. Abbott - Executive Vice President of Strategy & Go-To-Market

Analysts

James M. Kisner - Jefferies & Company, Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Sonus Networks Fourth Quarter 2012 and Full Year 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, February 28, 2013. I would now like to turn the conference over to Patti Leahy, Vice President, Investor Relations, Sonus Networks. Please go ahead.

Patti Leahy

Thank you, and good afternoon, everyone. Welcome to Sonus Networks' Fourth Quarter and Year End 2012 Operating Results Conference Call. Thank you for joining us today. As a reminder, a recording of this call will be available on our website at sonus.net. Also, for your convenience, we will post today's prepared remarks on our website shortly after the call. Speakers on the call today are Ray Dolan, Chief Executive Officer; and Moe Castonguay, Chief Financial Officer. Todd Abbott, executive Vice President of Strategy & Go-To-Market, is also here to address questions at the end of our prepared remarks. Please note, for purposes of Safe Harbor provisions, that during this call we will make projections and forward-looking statements regarding items such as future market opportunities and the company’s financial performance.

Actual events or financial results may differ materially from these projections or forward-looking statements and are subject to various risks and uncertainties including, without limitation: economic conditions, market acceptance of our products and services, the timing of revenue recognition, difficulties leveraging market opportunities, the impact of restructuring activities and our ability to realize benefits from the NET acquisition.

A discussion of these and other factors that may affect future results is contained in our most recent Form 10-Q filed with the SEC and in today's earnings release, both of which are available on our website. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so unless required by law.

During our call, we will be referring to certain GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to comparable GAAP financial measures is included in our press release issued today, as well as in the Investor Relations section of our website.

It's now my pleasure to introduce the Chief Executive Officer of Sonus, Ray Dolan. Please go ahead, Ray.

Raymond P. Dolan

Thank you, Patti, and good afternoon, everyone. I'm pleased to report that Sonus made significant progress this past year in our journey to transform our business into an SBC-centric company. As I discussed with you during our quarterly calls throughout 2012, we focused on 4 key metrics that we believe are foundational to our success. Those metrics were: SBC momentum, channel momentum, new customer growth and operational execution. I'll briefly address each one in turn. First, SBC momentum. We delivered outstanding results with our SBC products, gaining significant share and posting year-on-year growth of approximately 80% for SBC product revenue, including NET, and 64% excluding NET, both of which were significantly outpacing the overall market rate of growth.

In Q4 2012, Sonus's preliminary share of the SBC service provider market is in the low 20s, up from just under 3% in the first quarter of 2011. Our overall product mix also shifted substantially during 2012. For the full year, 44% of our product revenue is derived from our SBC business, which is up from 25% in 2011. We expect this metric to be north of 60% for full year 2013.

Obviously, we expect this metric to be influenced both by the decline in our legacy business as well as by the increase in our SBC business. Our guidance today of SBC product revenue, which is projected at 1.7x our trunking product revenue in 2013, makes it clear that we believe that Sonus is firmly positioned as an SBC company.

The second key metric we laid out was channel momentum. Again, we made considerable progress in 2012. We launched our channel program, Sonus Partner Assure, and have now recruited and trained over 30 select channel partners, well ahead of our original target of 20.

In concert with Partner Assure, we dramatically expanded our channel-ready products, both organically and through the NET acquisition. We now have the broadest portfolio of channel-centric SBCs, from the 5000 series to that SBC 2000 and SBC 1000 that are all purpose-built to the needs of enterprise customers seeking reduced network complexity and add capability by moving to SIP-based communications.

While on the topic of the NET acquisition, let me provide an update on the status of our integration efforts. This business has delivered on our expectations and, as we said at the time of announcing the transaction, we continue to expect it to be accretive to EPS in 2013. I am as confident as ever that the NET acquisition was the right thing to do to accelerate our SBC strategy and our efforts to address the enterprise segment. The former NET team brings strong knowledge of the enterprise and is a key enabler of continued growth in Microsoft Lync deployments, essential drivers for the next leg of our SBC growth story. The acquisition also brought a hybrid SBC product, which has proven to be very strategic to the U.S. government as it seeks to secure its network. These are capabilities and skills which would've otherwise taken as many months, if not years, to build on an organic basis, and we expect they will make a material contribution to our financial results in 2013.

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