Ray Dolan - Chief Executive Officer
Mau Castonguay - Chief Financial Officer
Amitabh Passi - UBS
Sonus Networks, Inc. (SONS) UBS Global Technology Conference Transcript November 14, 2012 3:30 PM ET
Amitabh Passi - UBS
Okay. We’ll get started with our next presentation. My name is Amitabh Passi. I’m the Networking Supply Chain Analyst at UBS. And it’s my pleasure to welcome Sonus Networks. And presenting on behalf of Sonus will be Ray Dolan, the CEO; and Mau Castonguay, the CFO. Thanks.
Thanks Amitabh. Yeah. For the record, it’s Mau Castonguay, I did it right, Mau?
Okay. Well, its late in a day here in New York. So thanks for all those attending in person for those out on the internet for the next 15 or 30 minutes or so. I’ll do my best articulate what I believe is really compelling story in a second and now going on third year of my participation at Sonus.
We are rapidly rewiring the business to being a growth oriented business around SBC’s. And in this third year on my tenure we will move beyond just growth into the SBC space and into the realm of profitability and operating cash flow based on non-GAAP basis profitability.
So I think we put up the Safe Harbor statement here everybody in the room and we’ll move beyond that. So summarizing our investment thesis is as follow. We have a very strong market opportunity in a growth market that is growing 21%, currently at $600 million growing to $1 billion in three years.
We are gaining share and the prove points are in our results. They are not just aspirations they are in results for SBC and I’ll talk to you about that going forward. Most, if not all of those results has been in [SP] side and we are moving into enterprise sector as well, which will increase the share of that addressable market that we are expose too and it ultimately we’ll succeed again.
Our recent acquisition of NET gives us an unmatch SBC portfolio from one to 60,000 sessions. We’ll talk a lot more about that in the relationship with Microsoft Lync.
And the bottom line investment thesis is the 2013 is our year, where we move to more than 50% of our product revenue being SBC related and then we drive beyond that to market -- margin expansion in the product side to service side, full year non-GAAP EPS positive and operating cash flow positive.
So I went -- its there. Starting with SBC market growth, so the TAM is about a $1 billion in 2015, it’s currently about $600 million, which is about two-third service provider and about one-third enterprise, and it will grow by 2015 to be about 60/40 service provider enterprise.
So the enterprise market is growing slightly faster than the mean, and the category growth rate four year CAGR is about 21%. So very healthy CAGR and in 2012 at the mid-point of our guide we will have grown at three times the industry CAGR. So we are gaining share.
The top five drivers of SBC adoption are down at the bottom of the slide, its SIP trunking, interconnect and enterprise UC, the fourth and fifth are lagging behind that considerably but they are emerging a strong drivers of future growth which is really evolving or UC over LTE and residential VoIP.
We have spent two years and we’ll spend another year or so transforming almost every aspect of Sonus. When I joined we were media gateway company. We are rapidly become SBC company.
We are evolving our go-to-market strategy from complex product sold largely direct to the service provider to whole product transactionally related plug and play product that can be sold both to and through service provider to the enterprise, and through the channel, and we are moving beyond voice as an app into the complex world of UC.
The important line on that slide is the last one. This will be our year 2013 where we move from operating losses to profitability on a non-GAAP annualized basis.
Let me explain the NET deal, we announced in June and closed in August, the acquisition of network equipment technology, it’s a long standing company that had grown up in the gateway business, principally the government side and it worked into a low end SBC product business attached to the Microsoft Lync strategy.
We purchased the company in August, August 27th I think we closed. We -- they driving the SIP trunking market on the low end as I said and this expands our product portfolio brings it forward on the low end at least 12 months to 18 months faster then we would have been able to do organically and we paid about $42 million all in for the acquisition, so little less then one time total revenue. So let me, I’ll get into the SBC portfolio graph in just a second on few slides.
So this next slide is our 2012 standalone and then consolidated with NET on a full year basis pro forma SBC guidance and that will be an 87 million SBC total revenue at the mid-point of our guidance which is 60% year-over-year total revenue growth, 80% year-over-year product revenue growth.
So we were doing great at the standalone business, and we had the opportunity to tuck in SPC revenue on the low end. We had commented, as I said from the heritage of high-end complex service provider direct sales.
We founded that any he chose to transition their strategy to the low end channel centric link oriented SPC sale. There was a perfect opportunity, but the two companies together drive synergies, the business will be accretive on a full-year basis in 2013 and will accelerate the strategy that we put in place, expanding into the enterprise and expanding into the UC space.
We’ve gained share every quarter this year. I’m confident when the results were in for Q3, that we’ll gain several share points in Q3 and again in Q4. We said at the beginning of the year, we wanted to be a strong second in the SPC market, we are there. That has been confirmed by Gartner's recent Magic Quadrant analysis, which puts us and one other industry leader in the top right leaders quadrant for the SBC space, and that is an important indication of future our field activity vendor selection in both the search provider and enterprise space.
So we are very pleased with these results, and I’d highlight that these results are really in the service provider space only. The enterprise space is an opportunity for us that we have not yet really penetrated. We laid the framework for that in 2012 by developing the Sonus Partner Assure channel program, which we now have 18 major channel partners in that program including service providers as well as of ours, and by deploying the 5,100 ourselves and by purchasing the 1,000 and 2,000.
So we now have an unmatched SPC product portfolio. As we said from one session up to 60,000 sessions, all of which is linked certified. In fact, there are seven SPCs in the market that are linked certified. We have four of those. The link business is over a $1 billion and together with other UC players, bring the unified communication market to a multi-billion marketing and growing
So what has long been long-term forecast is now actually being realized in the enterprise. And will ultimately land in the consumer market and in wireless. And we stand ready to be the access layer device, enabling multiple UC players to leverage the SPC in the network and in the enterprise. We deliver a media networking, which has been our heritage in the voice world. We switch over 700 billion of minutes of voice over IP, with tier one and tier two’s around the world.
And we bring that internetworking capability into the rich media space and we are planning to grow from there. So we are positioned very, very well in both the enterprise space, of the small base and the SP space.
With regard to our recently announced Q3 results, we basically hit our guidance, either in line or exceeding and I’m particularly proud of the fact that we exceeded our SPC guide, both on the product basis and on a total basis materially.
We hit out total company outlook. We marginally beat our margin outlook, and we hit our OpEx. In fact, we came in under our OpEx as we continue to tighten our build on an operating expensed basis. This peak was a one-time and normally, but I think we’ll show our guidance in Q4.
But we are going to continue to drive now that we moved our business strategy, our products and our results into the growth sector of SPC. We will move beyond the search provider, enter the enterprise, tighten our operating expenses, increase our gross margin and drive to profitability and cash flow.
Our outlook for Q4 took the gateway business down substantially, left the SPC product guide in place and the numbers are there in front of you. We had 68 to 69 for the year, with a 21 to 22, number on the product side, 87 to 88, all of which were at the midpoints of the high end our prior SPC guidance on an annual basis.
Our gross margin ended about 60%, leaving ourselves at an operating loss on EPS basis negative six to negative seven, but slightly positive for the fourth quarter. And our cash end the year at 270.
We did announce that we bought in more of the any keynotes than we had previously forecast by close, because folks tendered things with larger coupons and then we thought that they would tender. But simply cleans up our balance sheet. We’re further ahead of schedule and takes down that expense burden out of our ADS going forward.
So our profitability drivers are both strategic and operational. The strategy side is drive more paths to market, two more parts of the market specifically into the enterprise, which is already $200 million and growing and allow the service provider traction to become both a growth engine and a channel to the enterprise side of the market as UC gets materialized.
The UC market is an enormous pull through on the SPC side as our basics SIP trunking and appearing as we grow the market. And to drive profitability, it is to rationalize our expense structure particularly on the gateway side, continue to drive manufacturing cost that are fixed across the broader base of products and designed for manufacture to drive greater and greater gross margin as we scale and continue to sell two existing chassis so that we get the higher and higher session density so that the razor blade analogy starts to drive through and into our results.
All of which leading to profitability for the full year 2013 completes the investment thesis that we came to drive at Sonus. A 15-year old company that cut its teeth on a media gateway business that competed with the largest players in the industries, the Cisco’s, the Huawei’s, the Lucent’s, the Alcatel’s before they came together, the Ericsson’s of the world and scaled, carried great voice as an app and went public off those wins and continued to scale that business possibly too long as it start to eclipse has come back through its focus on ASBC side.
And that focus will be to attach to another great growth opportunity, drive share, ECEs do business with, diversify and expand its go-to market strategy and drive to profitability and cash. That’s the Sonus that you either invested in or contemplating investing in. That’s the Sonus that I’m proud to lead. It’s now my third year and to start on, I’m with here Mau and we can answer any questions.
Driving to high growth in the SPC market, clarifying what we said we would do, year in, year out, quarter in, quarter out, despite the headwinds, despite the shifts in our base business that obviously creating a more material challenge sooner than we thought and making the difficult decisions to drive the profitability next year.
So with that we have a few minutes more to answer any questions and then we can break out downstairs and continue to answer questions at that point in time. I know it’s making the days for the folks that are here. I heard a lot and there is a lot of noise on the marketplace. So all you are here with me. Any questions from the floor. Go ahead.
Amitabh Passi - UBS
We have a question over here.
I’ll go ahead and repeat the question if it’s easier.
(Inaudible) You sort of talk about why that is and what makes you think that will continue in 2013.
The question is which made mike partially on the web, which gained shares for the last several quarters in the SPC market. Why and how will that continue?
So we gained share largely in the SPC side and we gained share through the robustness of our 9,000 platform. The maturity of the 5,200 as it continued to scale this year and the drive to 5,100 which is just starting to appear on our results.
And our commitment to the category, the fact that we understand voice which still drives New SIP Trunking and appearing a lot of the SPC category. And our knowledge of scalability, reliability into the service of other side. We’re gaining momentum, not losing it. So I think that share gain will continue albeit far more modestly.
I mean, there is no way we will grow three times the market next year. There is no way we will gain as many share points again -- well, I shouldn’t say this. We will take all we can get but I don’t want to set expectations that are high certainly externally because we’ve gained material share there. But I think our biggest incremental opportunity is going to be in the enterprise.
So this year, what did we do. We laid the framework for that enterprise strategy at the beginning of the year. We committed substantial resources to product development of 5,100 to our user interfaces so that we have the same and we can feel across all the product line and we’ve leveraged our balance sheet by NET.
So that we could go to market with an end-to-end solution attached to our major player in the UC market. And we’re going to focus hard there through the channel not just with Microsoft but with all channel partners and drive UC at the access layer, okay.
So I think it’s an enabler of a big market a multibillion UC market, qualified and simplified. I don’t I can’t overestimate to you how much work it takes, take a complex product that’s been brought to market for 15 years through a direct channel into a transaction oriented company that can sell through the channel and into the enterprise on a plug and play basis, that’s a lot of innovation, it continues to stay and that what’s going to drive our growth going forward. Okay, thanks for the question.
Hey, Ray, if I could, unfortunately, I’m relatively new to the Sonus story, but I am curious as you look at the SBC market, its large market, attractive CAGR? But what other elements made it attractive for you to enter, did you have any sort of core expertise that you are able to leverage, did you see a weakness in the competitive environment I would love to understand sort of a thought process going after this market?
Sure. So, what attract us to the SBC market? Well, that actual strategy had been a framework that have been laid prior to my arrival by upgrading the flagship the 9,000 from GSX or Gateway into an NBS9000 was now in SBC9000 and that was done by just software upgrade to that product.
What made that a smart strategy is that there was already a large market and a growing market in a SBC space dominant by one industry leader, that we felt we can take on with the right amount of focus, and the key ingredients there were, common customer base, smart folks that really scale voice, that really taking on large players in the past at one, some of that talent was still with the company, some of that had moved on, its been 10 year since the beginning of that story.
Transcoding is now and we’ll continue to become initially going forward and we are smart on that and we understood the scale requirements of the carrier space. The real challenge on my arrival was whether we understood the implementation requirements and whole go-to-market model being into the enterprise and selling through the channel.
And that has taken the full two years of my tenure a lot of works from Todd Abbott who now drives are go-to-market strategy all the way out to the sales and marketing engine. And a lot of work across functionally led by Todd and other members in leadership team to get a sense of that market.
So, that’s what drove to us and with $600 million in addressable market going to $1 billion it will now be bigger than the market that we use to be the leader of and still are on a revenue basis the leader which is the gateway market. So its one decline the other came in and it was a perfect transition for us.
Amitabh Passi - UBS
Do we have any other questions? We have one okay in the front.
Hi, thanks. AT&T recently announced $14 billion build out broadband and LTE. I believe in the past they were a 10% customer maybe more on the gateway side? But could you talk about how your position to potentially win some of that opportunity whether it’s a SBC side or maybe in some emerging technologies like Voice-over-LTE?
Sure. So the question is AT&T announcement, first of all, just for the record, AT&T is historically our largest customers, that’s out in print and from time-to-time AT&T cycle in and out of 10% customer and I would expect that trend to continue. We have very healthy strategic relationship with family work in very hard to make sure that we remain one-off their trusted partners as they grow.
Having said that, reluctant to comment on exactly where we’ll fit into that architectural, though we are very strategic on a number of areas and I think important to both of those markets, namely really understanding voice as it evolves for video, really understanding policy, scalability, reliability and/or willingness to work with partners because they drive all of their business through domain players.
So, that’s probably as far as I go on that as far as what opportunity exist there. But we consider that to just be one of the number of the opportunities in both side of the SBC market, okay.
Amitabh Passi - UBS
Hey, Ray, maybe I can throw one more and diameter rounding how do you see that market developing and do you have a plan that space?
I see that market involving in 2013 through '15 it starting become an interesting market. It’s mostly a wireless singling market that we plan overtime, but I don’t have anything to discuss in 2013 with respect to our guidance. As I said, we are happy to take questions downstairs in our breakout.
Thanks to the AT&T announcements can you describe or give us a feeling for how of that spend is going to be directed toward equipment to that you deliver or…?
Yeah. Hi, [Krishna], I could break that out. I mean if you just look at our history, our numbers with AT&T are not going to be the big needle of that announcement move. So, I probably just to this, let them articulate that strategy little more broadly, we’ll work with them and if its part of our guide next year we will get there, okay.
So, okay, I know we are about the break here in a minute, invite you the extensive interest, I know it’s been a long day to join us downstairs. I simply want to get the following point across. This has been and continues to be a multi-year journey as we rewire a once great media gateway company.
We are strategic in a growth market, on behalf of 11,075 people we are passionately meeting the needs of our customers and this is our year, 2013 is our year of growth and to drive to profitability and operating cash flow generation. Thanks for your time and I appreciate your interest.
Amitabh Passi - UBS
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