SONS

Sonus Networks, Inc. (SONS)

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Sonus Networks (SONS)

Q4 2011 Earnings Call

February 21, 2012 4:45 pm ET

Executives

Patti Leahy -

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

Maurice L. Castonguay - Chief Financial officer and Senior Vice President

Todd A. Abbott - Senior Vice President of Worldwide Sales and Marketing

Analysts

Paul Silverstein - Crédit Suisse AG, Research Division

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Catharine Anne Trebnick - Northland Securities Inc., Research Division

Jonathan Kees - Capstone Investments, Research Division

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

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Sonus Networks Q4 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, February 21, 2012. I would now like to turn the conference over to Patti Leahy, Vice President of Investor Relations. Please go ahead, ma'am.

Patti Leahy

Thank you, Grant. Good afternoon, everyone. Welcome to Sonus Networks' Fourth Quarter and Year Ending 2011 Operating Results Conference Call. Thank you for joining us today.

With me on the call this afternoon are Ray Dolan, Chief Executive Officer; and Moe Castonguay, Chief Financial Officer. Todd Abbott, Senior Vice President of Worldwide Sales and Marketing is also here to address your questions at the end of our prepared remarks.

Before we get started, I would like to remind you that a recording of this call will be available on Sonus Networks' Investor Relations website. 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. Please note that 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 limitations, difficulties we may experience in expanding our customer base and in leveraging new market opportunities.

A discussion of factors that may affect future results is contained in our recent filings with the SEC, 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.

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

I'd now like to turn the call over to our CEO, Ray Dolan. Please go ahead, Ray.

Raymond P. Dolan

Thank you, Patti, and good afternoon, everyone. I'd like to start the call today with an overview of our fourth quarter highlights and our SBC expectations for 2012. I'll also provide some context around our broader opportunity and how it's shaping our focus this year. Moe will then go into more details about our financial results and outlook and I'll close with the metrics I believe you should be tracking as we progress through the year.

Turning to our fourth quarter highlights, total company revenue was $74.3 million, up from $66.4 million in the third quarter. Our SBC total revenue, including maintenance and professional services, was $22.5 million, up from $13.9 million in Q3. Our SBC product-only revenue was $17.5 million, up from $10.4 million in the third quarter.

In the second half of 2011, we added 20 new customers, 19 of which purchased SBC solutions from us. In the fourth quarter alone, we added 12 new customers, 11 of which purchased SBC solutions.

In 2011, our SBC business clearly became a material part of our overall revenue mix, representing 30% of total revenue for the fourth quarter and 20% for the full year. This is up from 14% in 2010. We expect this trend to continue in 2012.

Before discussing our revenue expectations for the SBC business in 2012, I'd like to take a moment to talk about our outlook for our media gateway business. Our guidance assumes a 10% decline for our media gateway product revenue this year. While this business remains a healthy asset for us, we are providing this outlook for 2 main reasons: First, even though many service providers are still in the early stages of adopting SIP-based solutions, service provider CapEx spend is expected to be pressured in the first half of the year. Second, the media gateway business is characterized by long sales cycles and highly-customized implementations, which have contributed for the lack of linearity in our results. We will continue to invest in and support the media gateway business, particularly since it offers a unique opportunity to migrate our install based SBC solutions. But our primary focus is on expanding our sales coverage to address high growth areas of opportunity, including the SBC market. As such, we expect growth in our SBC business to more than offset the anticipated decline in the media gateway product revenue.

Turning to SBC, we are guiding to full year 2012 SBC total revenue of $75 million to $80 million, including maintenance and professional services and $60 million to $65 million on a product-only basis. This performance is expected to outpace industry growth forecasts and result in an increase in our market share.

Before handing over to Moe, I'd like to spend a moment on how we see the opportunity for Sonus shaping up this year and into the future. Our potential is unlocked by building a team that has the passion and intellect to recognize opportunity and importantly, to execute a strategy that takes advantage of it. We have built that team, and we are now organizing around a strategy that we believe leads to meaningful growth and value creation. There are a number of key trends which are driving this strategy. First is the consumerization of IT, also referred to as BYOD or bring your own device. This will increase the requirement of more voice and unified communication into the cloud in order to enable the delivery of a consistent set of UC functionality to a expanded set of endpoints. Enterprises are challenged to incorporate these new communication devices such as smartphones and tablets to enable new UC capability for their employees and ultimately their customers.

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