SONS

Sonus Networks, Inc. (SONS)

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Sonus Networks (SONS)

Q3 2012 Earnings Call

November 07, 2012 8:30 am 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 and Senior Vice President

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

Analysts

Natarajan Subrahmanyan - TheJudaGroup, Research Division

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

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Jonathan Kees - Capstone Investments, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Sonus Networks Third Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, November 7, 2012. I would now like to turn the conference over to Patti Leahy, Vice President, Investor Relations. Please go ahead, ma'am.

Patti Leahy

Thank you, and good morning, everyone. Welcome to Sonus Networks' Third Quarter 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. 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 your 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, any statements related to our acquisition of NET or their financial results and outlook, 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 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.

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 in the Investor Relations section of our website at sonus.net.

Please that we have provided a new supplementary schedule in the Investor Relations section of our website, which includes financial and operational metrics for Sonus on a standalone basis going back to Q1 of '11 and for Sonus and NET beginning with Q3 of this year. NET results reflect a partial period from August 25 through September 28.

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 morning, everyone. Sonus delivered solid third quarter results in an increasingly challenging macro environment. I'm particularly proud of our SBC performance, which grew 78% year-over-year and 37% sequentially. These results exclude NET's partial period contribution, and they continue to be significantly ahead of the SBC industry growth rate.

Before Moe covers our results in more detail, I'd like to address 2 key themes with you. First, I'll address the outlook of our consolidated business; and second, I'll review some of our key accomplishments.

Turning to our outlook first. The external environment has become more challenging than we anticipated, even as recently as our Analyst Day. A weak macroeconomic environment has caused our service provider customers to scrutinize their CapEx spend much more closely. Many service providers are now deferring the purchase of additional TDM assets, while leveraging their existing gateway capacity and focusing their resources on new revenue-generating IP service infrastructures.

The fact that our third quarter is normally back-end loaded due to the summer months prevented us from seeing these trends early enough to revise our guidance prior to Analyst Day. The trends are now clear to us and embedded in our guidance for Q4, which implies approximately 30% year-over-year decline in our media gateway product revenue. We expect this could continue into next year.

Fortunately, our SBC growth engine is benefiting from favorable industry trends around SIP trunking and unified communications. In fact, excluding NET, our SBC product revenue is expected to grow in excess of 65% year-over-year in 2012, or 3 times the industry's rate of growth according to Infonetics.

Our revised annual outlook, which Moe will cover in more detail in a moment, includes total SBC revenue expectations at the high end of the range previously provided and a decrease in our media gateway product revenue outlook. As we navigate through this economic and market uncertainty, we will continue to adjust our operating expenses in order to meet our commitment of non-GAAP profitability in 2013.

This environment is, without a doubt, challenging, but make no mistake, this is a challenge we are prepared to win. We are making excellent progress in transforming the mix of our business. And frankly, the faster we get through the challenges associated with our media gateway product revenue, the faster we will reach our goal of being a consistently profitable growth company.

This brings me to my second theme, which is our recent key accomplishments. A key operational milestone in Q3 was closing the acquisition of NET, a leading provider of SBC solutions for enterprise Microsoft Lync UC deployments. The SBC 1000 and SBC 2000 will be key contributors to our enterprise UC business, which is an important source of our future growth.

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