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Sonus Networks, Inc. (NASDAQ:SONS)

Q1 2009 Earnings Call

May 5, 2009 10:00 am ET

Executives

David Roy – Vice President of Investor Relations

Richard N. Nottenburg, Ph.D – President & Chief Executive Officer

Richard J. Gaynor – Chief Financial Officer

Guru Pai – Senior Vice President of Sales and Services, Business Development & Strategy

Analysts

Steven O’Brien – JPMorgan

Rajiv Jenveja – Jefferies & Co.

Edward Jackson – Cantor Fitzgerald

Greg Mesniaeff – Needham & Company

James Falkoff – Robert W. Baird & Company

Ari Bensinger – Standard & Poor's

Paul Silverstein – Credit Suisse

Operator

Good morning and thank you for standing by. Welcome to the Sonus Networks first quarter 2009 financial results conference call. At this time, I would like to remind everybody that today’s call is being recorded and all participants are currently in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Mr. David Roy at Sonus. Please go ahead Mr. Roy.

David Roy

Thank you, and good morning everyone. My name is Dave Roy, and I handle Investor Relations at Sonus. With me on the call this morning are Richard Nottenburg, our President and Chief Executive Officer and Rick Gaynor, our Chief Financial Officer, who will both address you shortly.

And also with us today is Guru Pai, our Senior Vice President of Sales and Services, Business Development and Strategy who many of you have met. Guru will be available after our comments to help answer your questions.

Earlier this morning we issued a press release announcing our results for the first quarter of 2009. The text of this release, along with the accompanying income statement, balance sheet, and operating statistics, as well as a reconciliation of the most directly comparable GAAP financial measures to any non-GAAP financial measures used during this call, and for certain prior periods, are available on the Investor Relations section of our website.

Before Richard offers his opening remarks, I would like to remind you that during this call, we will make projections or forward-looking statements regarding items such as future market opportunities and the company’s financial performance. These remarks about the company’s future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the private securities litigation reform act of 1995.

These projections or statements are just predictions, and involve risks and uncertainties, such that actual events or financial results may differ materially from those we have forecasted.

As a result, we can make no assurances that any projections or future events or financial performance will be achieved. For a discussion of important risk factors that could cause actual results or financial results to vary from those forward-looking statements please refer to the risk factors section of our most recent quarterly report on Form 10-Q, which is on file with the SEC as of this morning.

Any forward-looking statements represent our views only as of today, and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point, we specifically disclaim any obligation to do so, unless required by law.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the Investor Relations section of our website.

I would now like to turn the call over to our CEO, Richard Nottenburg. Rich?

Richard N. Nottenburg

Thank you David and good morning everyone. Thank you for joining us on the call today.

As we expected coming into this year, we had a tough quarter. The first quarter typically delivers the lowest revenue of the year for Sonus. And like many of peers in the industry, this year was further impacted by the reduced spending by telecommunication service providers. While our value proposition remains strong, the economics replacing legacy infrastructure with next generation equipment is less attractive than it was a year ago.

Many of our customers have reallocated capital to revenue generating activities by extracting more value from their existing assets. While we expect this cycle of low return investment for our industry to be only temporary, it continues to have a substantial impact on our product sales. However, despite the reduced spending by our customers, there are certainly some positive signs and we experienced a significant uptick in RFB activity over the prior quarter.

Given the general health of our customer balance sheets, we’re hopeful that this RFB activity will eventually drive more normal capital allocation and spending. With that said, I'm confident about the way we have managed our business during this quarter and the execution of our plans for 2009. We continue to manage Sonus using three guiding principles of realigning the business in the market, carefully managing our balance sheet, and investing in new products and service offerings for our future. And I will update you on our progress later. Before Rick goes into the financial details I want to share a few key takeaways from the first quarter.

Revenue was $41 million for the quarter compared to $73.6 million for the same period last year. Non-GAAP operating expense has been reduced to $36.5 million from $47.6 million in Q4 2008, and down from $42.5 million in Q1 2008. Non-GAAP operating loss was $12.6 million for the quarter compared with non-GAAP operating income of $4.8 million in Q1 2008. Our book-to-bill ratio was below one and we maintain a strong cash position of $386 million at quarter end with no debt.

I have now been in Sonus for over ten months. I joined this company as the world began to experience the worst financial crisis in at least a generation. I view periods of significant dislocation as an opportunity to build strong businesses. I believe Sonus has important assets and a compelling value proposition and I remain confident in our future. While no one can predict what the economic landscape will look like after the credit markets heal and economies resume growth. I believe Sonus will be better position to participate in the recovery of our markets with the products and services customers want and need from a business with healthy and sustainable operating margins.

I will now hand the call over to Rick to review the financials in more detail, then I will come back to update you on our business progress for the first quarter of 2009. Over to you, Rick.

Richard J. Gaynor

Thank you, Rich, and good morning everyone. Please note that throughout my discussions, I will reference both GAAP and non-GAAP financial information. There is a reconciliation of GAAP to non-GAAP in the investor relation section of our website.

Please also note that our financial results can vary significantly from quarter-to-quarter. So we encourage you to evaluate us on the longer-term annual basis. Please be reminded that due to the sale of our Zynetix subsidiary in the fourth quarter of 2008, the results of operations of Zynetix have been reported as discontinued operations, in our statements of operations for 2008. So they will be excluded from my discussion of the results of operations for the fiscal 2008 periods.

Revenue for the first quarter was $41 million, down 54% from $89.5 million in Q4 2008 and down 44% from $73.6 million in Q1 2008. Our book-to-bill in the quarter was below one. There was one customer that contributed greater than 10% of total revenue in the first quarter and that was AT&T.

Looking at revenue geographically, domestic revenue accounted for 71% of revenue versus 40% in Q4 and 84% in Q1 2008. Our top five customers represented approximately 42% of revenue in Q1, compared to 58% in Q4 and were 58% in Q1 of last year. We reported revenue from 82 customers in the first quarter, similar to 82 in the fourth quarter and 81 in Q1 2008.

Before I go into further details, I would like to point out that these are non-GAAP numbers that exclude stock-based compensation, amortization of intangible assets and restructuring expense in both 2008 and 2009. These non-GAAP numbers also exclude legal settlements, the reduction of a loss contingency related to an employment tax audit, impairments of intangible assets in the Zynetix earn out in 2008.

Non-GAAP gross margins for the first quarter were 58.3% of revenue compared to 45.5% in Q4, and 64.3% in Q1 2008. Product gross margin for the first quarter was 69.5%, compared to 49.3% in Q4 and 67.6% in the same period last year.

Service gross margin was 48.2% compared to 39.7% in Q4 and 56.9% in Q1 of last year. While there was continued pressure on service gross margin due to recently implemented maintenance pricing reductions, we did achieve the low end of our overall gross margin target range of 58% to 62%.

Total operating expense for the first quarter was $36.5 million, down from $47.6 million in the fourth quarter and down from $42.5 million in the first quarter last year, reflecting cost reductions from the right-sizing and realignment actions we have taken.

Rather than going through all of the expense line items for the quarter that detailed information is in the Investor Relations section of our website, where we reconcile our GAAP to non-GAAP information. I encourage you to visit that site.

Looking at our headcount, we ended the quarter with 910 employees compared to 991 employees at the end of Q4. While Sonus has reduced headcount, we continue to hire in some geographies to support future business plans. At the end of Q1, we had 170 employees, nearly 20% of our total headcount in lower cost geographies, supporting our drive for lower overall expense levels.

We ended the quarter with cash and marketable securities of $386 million above our guided range of between $370 million and $380 million. The main reason for cash coming in above guidance was better than anticipated collection performance in the quarter.

On our last call, we talked about the timing of our AT&T revenue. As a result of a two year maintenance contract renewal and accounting revenue recognition rules, revenue we book and ship with AT&T gets deferred and subsequently recognized on a prorated basis from the point of sales through year-end 2010.

As an additional data point, we said we will provide you with a portion of deferred revenue that is from AT&T. At the end of the first quarter, total deferred revenue was $92.3 million. Of that total, AT&T deferred revenue was $28.9 million that compares with total deferred revenue of $79 million and AT&T deferred revenue of $24.4 million at the end of last quarter.

Looking forward, we reiterate that we expect revenue for 2009 to be substantially lower than the revenue we realized in 2008. Our 2009 gross margin percentage is expected to be within, but at the lower end of our longer-term target range of 58% to 62%, a target range, which we also reconfirm today.

Total operating expenses are expected to be in the range of $145 million to $155 million for the year. We expect operating expenses in Q2 to range between $35 million and $37 million. We expect second quarter ending cash and investments to be between $370 million and $380 million, down some from Q1, as a result of starting with a much lower accounts receivable balance to collect against. Again based on our current outlook, we believe we will be able to report cash balances above $350 million to each period of 2009.

Basic share count for Q2 should be approximately 274 million shares. One of the areas for improvement we indicated to you on our last call was that we wanted to improve the timeliness of our financial reporting. In reporting our results and filing quarterly 10-Q today, we cut three days off our Q1 reporting schedule of last year. We will continue to focus on further improving our reporting timeliness as we go forward.

We continue to believe that from an economic and industry perspective, 2009 is going to be a difficult year. We are executing our strategy based on the assumption that there will be no improvement in the overall economic environment this year. We believe we've been realistic about 2009, we will continue to be conservative in our spending, while at the same time making the key and significant investments needed to prepare the company to take advantage of the return to more normal economic and industry conditions when that occurs.

As we said in our last conference call, during economic downturns, good companies, lower OpEx, sharpen their R&D focus, and invest in opportunities that can generate positive results for shareholders. And we started 2009 with a plan that we executed against in the first quarter. I look forward to reporting continuing progress against that plan to you throughout the year.

Now with that let me turn it back to Rich.

Richard N. Nottenburg

Thank you, Rick. As you have heard, this was as expected a tough quarter. We have managed cash prudently, made important organic investments in product and service offering and preserve gross margins to ensure that we can drive profitable growth. I want to update you on the three guiding management principles I established back in September 2008, those being right-sizing and realigning our business for the market, managing our balance sheet, and investing for profitable growth.

Firstly, we have carefully evaluated the competitive landscape and the markets we serve, we have made good progress in realigning our business and our investment strategy to the market opportunity we see for 2010 and beyond. Over the last three quarters, we have substantially reduced our overall operating expenses, dramatically reduced our break-even point, and improved our internal discipline to focus on building positive operating leverage into the business.

I'm pleased that we have been able to execute on cost management, while maintaining a stronger more market focused product roadmap and delivering new solution offerings. I recognize that this has been a difficult time for all our employees and I'm encouraged by the enthusiasm and positive attitude I see across all Sonus sites. I want to thank all our employees for their continued hard work and support while we reenergize our business, by building speed, agility and improved line-of-sight throughout all our operations. To execute our plan, we need to substantially grow the percentage of R&D and other headcount spend in lower cost geographies.

We now have approximately 20% of our total headcount in lower cost geographies predominantly in our Bangalore facility and we continue to allocate development and support projects to the most cost effective skill centres in the U.S., Asia and Europe. We have also begun to establish Centers of Excellence at each of our major R&D sites to ensure that each site has a principle mission. All of our major global development sites have complete architectural knowledge and the thought leadership required to create world-class product and service offerings.

I am pleased that Sonus has demonstrated the ability to act quickly and decisively making our organizational realignment immediately cost effective. And we are making these transitions while instituting processes that will continuously improve product quality through better product definition, enhanced platforms, test automation and service ability. We believe these process improvements will enable us to run the existing business at an even lower cost point in 2010.

Our second guiding principle is balance sheet management. This is the key to providing a platform on which Sonus will be profitable and agile enough to differentiate ourselves from our competitors who may be compromised by being undercapitalized or over leveraged. I'm told by our customers that balance sheet strength continues to be an important criteria in strategic partner choice. A strong balance sheet allows us to invest organically over a longer-term horizon.

We are seeing opportunities to leapfrog our competition through internal investment and accretive technology acquisition, and so to our third principle, investing for our future. I believe, we cannot cost cut our way to prosperity. So this is the area I'm concentrating on going forward. Our focus on driving our cost structure downward, managing our balance sheet and refocusing our R&D efforts has enabled us to put oxygen back into the business and restart innovation. The enthusiasm I now feel from our development teams across the world is driven by the new products they are working on.

As part of this investment for the future I want to give you an update on our investment in the session management space. We continue to invest in solutions that address hybrid network topologies. These are platforms that simultaneously support both TDM-to-IP and IP-to-IP networks and our characteristic of the vast majority of our customers' networks.

As many large enterprises migrate to IP-based PBXs, they require both PRI and SIP trunking services supported by unified routing and policy management services. We have and continue to make investments in technologies that greatly simplify management and provisioning of these complex and scaled hybrid networks, thereby enabling our service provider customers to become more competitive.

Our investments have begun to bear fruit, as we have been making good progress with new anchor tenant operators and partners, while continuing to support our existing customer base. Our current IP peering solution has proven to be a secure, reliable carrier-class product, and continues to gain traction, a substantial portion of our customer base have chosen the Sonus Network Border Switch as an element of their IP-peering solution. We also know wireless carriers are increasingly looking at ways to improve voice quality and reduce OpEx associated with long-distance and inter-office voice traffic. We are investing in products like the Sonus Mobile SecurEdge that adds mobile-specific protocols, signaling and codecs to our IP peering portfolio, and extend our value proposition to this key segment.

I mentioned during the Q&A on our last call that there was an opportunity to disaggregate some of our solutions, and better utilize the wealth of intellectual property and assets we own. We see the potential to increase our addressable market by introducing new product lines at the scale and cost points that will allow to sell direct and through partners and channels. We continue to develop this roadmap and we will update you on progress as we go forward.

In summary, before we turn the call over to your questions, we have begun to establish a foundation for delivering our commitments to you. Our plan for running our business more efficiently, lowering OpEx, sharpening R&D focus and investing in opportunities that will drive the IP voice market is well underway. We have a much leaner and more efficient organization than we’ve had in 2008. While visibility in the current climate is difficult, they are positive signs. I had met with many customers since this economic crisis began and they recognize that they will need to continue to transform their networks by replacing legacy assets at a much lower cost point and deliver next generation services.

As I have said before, great companies are built during tough times. And that remains my goal for Sonus. I am confident that I have the team to plan and the balance sheet in place to exit this year as a stronger and more competitive company. Back to you, Dave.

David Roy

Thank you Richard. Operator, could you please provide our callers with the instructions on how to ask a question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question is coming from the line of Steven O’Brien from JPMorgan. Please proceed with your question.

Steven O’Brien – JPMorgan

Hi, good morning. Thanks for taking my question. I would like to talk a little bit about the deferred revenue balance, which grew this quarter resizable $13 million in which I guess about $4.5 million of that from AT&T. That increase was mainly in the current portion of deferred revenue. So, can we start to assume that demand might be slowly picking up in line with Rich's comments on the RFP activity, carrier CapEx budgets at least in North America seem a little bit back-end loaded this year. So, is there some room for some optimism or ramping off of this level in terms of revenue going forward?

Richard J. Gaynor

Well, if you look at the total deferred revenue balance, Steve, going up $13 million is obviously a positive indicator for us and being in the current portion is also positive for us. That being said, I wouldn't get overly optimistic on that, because it is within our normal range of deferred revenue being in the 80's, $90 million. So it’s a positive indicator, but I wouldn’t read too much into it, because it’s within sort of the normal deferred revenue range for us.

Steven O’Brien – JPMorgan

On that same normal level, I mean that the aggregate deferred revenue including the long-term deferred revenue and sort of the same level, whereas Sonus' deferred revenue had been in the past when recognized revenue on the P&L was in the $80 million, $90 million range. So I mean is there still a broad base of business that start to come through at some point in the future of these projects, stop getting pushed off?

Richard J. Gaynor

Well. Again, Steve, I would say as you pointed out, it is sort of a positive indicator for us at some level, because to reach the kind of numbers that we are expecting to get for the rest of the year. Obviously, we need to trade it a little bit above better than our revenue numbers in Q1. So building up some deferred revenue certainly helps us in the back half of the year. So I think it is a positive indicator that our plan for the year still remains relatively on track. Maybe Rich do you want to?

Richard N. Nottenburg

Yeah. I think Rick has answered the question on the deferred revenue side, Steve. But I'll just kind of give you some kind of color. If you think of it in the following way, there was basically a shock to the system in Q4, and there is obviously some hangover that we see. And I think you have correctly identified that carry budgets are significantly back-end loaded. I think that we'll know a lot more about the back-end of the year. As frankly, as we get close to the back end of the year, I think that the issue in this environment, is lower visibility. But that being said, I think that there is more optimism because of the activity, and I think that's an encouraging sign.

Steven O’Brien – JPMorgan

Rich, if I could ask one quick follow up, Rich, you outlined SIP trunking as an area for potential growth and potential investment for Sonus. It seems like the early part of this market has taken off more on a sort of a all-IP nature, when you look at the aggregate SIP trunking opportunity, do you see the need for TDM-to-IP conversion being a substantial part of this market opportunity or is the early growth in the sort of all-IP area more aware this market is going to trend longer term?

Guru Pai

Hi, Steve. This is Guru. Let me try to take a crack at that question. Working closely with our customers, we are pretty confident in our hybrid strategy. I think when we start looking at the market landscape for business customers, there is a very large predominance of client activity is VRI, which is our TDM solution. And there is also a rapidly emerging IP peering market for those business customers as well and that’s exactly the solution that we bring to market with a hybrid IP peering strategy. So we see that persisting for sometime, as again the predominance of the voice market is still TDM. That being said, the IP peering and session management space is clearly an area that we are investing in, we see opportunity and we will keep you closer on our product strategy as we move forward in time.

Steven O’Brien – JPMorgan

Thanks. I appreciate it.

Operator

Thank you. Our next question is coming from the line of George Notter from Jefferies. Please proceed with your question.

Rajiv Jenveja – Jefferies & Co.

Hey, guys. This is Rajiv Jenveja for George Notter. I just want to ask about in RFP activity levels. You describe them as improving and I want to make sure we understand that it is in fact improving relative to last quarter. If that’s accurate I just want to kind of understand how that compares to visibility. It sounded like visibility was still a little rough and kind of want to balance the two and understand how that dynamic works.

Guru Pai

I think RFP activity is a leading indicator of what we believe is going on in the marketplace. However, we still don't have visibility into what portion of that RFP activity actually converts to bookings and orders and I think that’s the part which is sort of more macroeconomic related, and where it is difficult for us to have visibility into exactly what that conversion rate from RFP to bookings and revenue is?

Richard N. Nottenburg

The other thing I want to follow-up with is that what I feel really good about is that when we enter into these RFPs, I feel we have a very competitive and a very, very strong value proposition. So I feel good about the activity, because I think our responses have been very strong.

Rajiv Jenveja – Jefferies & Co.

Okay. And then I guess my other question was on the break-even point from a top line perspective. Last quarter you kind of pegged that at an annual run rate of $250 million and you have since continued to make some OpEx improvements and headcount reductions and so forth. Is that $250 million number still accurate or have we kind of changed the bar there at all?

Richard J. Gaynor

No, that number is still accurate and we didn’t see much change in the overall outlook and view for the year that we have internally based on Q1. So that number is unchanged.

Rajiv Jenveja – Jefferies & Co.

Okay. Okay.

Richard N. Nottenburg

And I think the other thing just, one thing I want to add to that is that we did say that we would double dip as we see some of this transition in terms of some of our R&D activities. But I want to make it very clear that, we don't plan on running this business by essentially cutting our way to prosperity, we plan on investing. And I think we feel comfortable with how we're going to exit 2009 in terms of being more competitive and exiting with the right cost structure.

Rajiv Jenveja – Jefferies & Co.

Okay, great. Thank you.

Operator

Thank you. Our next question is coming from the line of Ted Jackson from Cantor Fitzgerald. Please proceed with your question.

Edward Jackson – Cantor Fitzgerald

Thank you. Thanks for taking my questions. My first was really simple that I missed AT&T deferred revenue for the quarter.

Richard J. Gaynor

AT&T deferred revenue for the quarter was $28.9 million in total.

Edward Jackson – Cantor Fitzgerald

Great. And then the one that's a little more entertaining is I wanted to hear from you, from a vertical basis. Let's call it strengths and weaknesses in terms of like say class 4 to class 5, if you would, wireless to wireline to cable, if you would. And then perhaps you could talk about the strengths and weaknesses there and tie it back to the comment you made about stronger RFP? Thank you.

Richard N. Nottenburg

Yeah. I think it's pretty clear that we built this company, a substantial part of this company on doing class 4 replacement. I think we are extremely strong in that business. I think we're strong in retrunking. And I think that obviously, we continue to replace the legacy base transitioning from TDM-to-IP. I think on the class 5, so we’ve been very opportunistic. We need to look at some of the things we've done at Carphone Warehouse and J-Com I think speaks well for what we have done with the ASX. I think on a go-forward basis, I think it’s pretty clear we've made a substantial investment in IP peering, and we recognize that’s a very important segway for us into wireless, and that's where we are putting our investment dollars. Maybe Guru, you want to add.

Guru Pai

Sure. Again, just to reiterate what Rich said, historically a very large portion of our embedded base is our wireline customers, our wireline platform customers. As some of those customers take a progressive shift in terms of origination and termination of voice minutes, that's now shifting significantly over the wireless. We capture those wireless minutes either as they aggregate in class 4 networks of customers that we sell products to, or in terms of class 4 or inter-office networks deployed by those wireless service providers themselves. Having said that, our predominant sales continue to be in the wireline class 4 area.

Edward Jackson – Cantor Fitzgerald

But what about relative to vertical market strengths, I mean, are you seeing a pickup in RFP activity at the class 4 level, the strength that you’re talking about in terms of RFP activity coming from class 5, is it coming wireless, cable, wireline? I mean, how about sort of a look forward, if you would relative to the activities that you’re seeing in the market?

Guru Pai

I think what's interesting is we are seeing relative strength across all the segments in which we are competing. So I don't think there's a distinct pattern to be drawn there.

Edward Jackson – Cantor Fitzgerald

Okay. I'll step out of line and re-queue. Thank you.

Guru Pai

Great.

Operator

Thank you. Our next question is coming Greg Mesniaeff from Needham & Company. Please proceed with your question.

Greg Mesniaeff – Needham & Company

Yes. Thank you. I was wondering if you could give us an update on your activities in the session border controller area? If there are any…

Guru Pai

Sure. So, again we do not build a session border controller as it is designed as in terms a stand-alone appliance. From our perspective, our network border switch is our IP peering solution that brings session border control functionality as part of a software, as a piece of software that runs on our GSX platform and other platforms that we provide. Essentially, the reason for this is that it solves what we call the hybrid network topologies for our service providers needing to provide both TDM interconnections as well as IP connections to their customers. And again, but having said that, the session management space is clearly an attractive space for us and we’re evaluating how we can take our IPR, disaggregate our IPR and use that in different products that we are evaluating bringing to market.

Greg Mesniaeff – Needham & Company

Thank you.

Operator

Thank you. Our next question is coming from the line of James Falkoff from Robert W. Baird. Please proceed with your question.

James Falkoff – Robert W. Baird & Company

Hi, on for Ken Muth, thanks. I just wanted to hit on the Access business in Europe. That was an area with a lot of momentum, say, a year ago with some of the drivers like Voice over Broadband. I don't think it’s received as much attention on these calls, the last couple of quarters. So if you just give us an update what’s going on in that market in terms of where you are with existing deployments? Are you still winning new Access business? And then how big a focus is that for you relative to kind of some of the focus areas like session border control.

Guru Pai

The Access business is an important business for us, right, and Europe is an important market and geography for us and we compete pretty aggressively there. Having said that the class 5 replacement industry is not proceeding as at faster rate as we would have all liked. And I think at the end of the day, the Voice over Broadband projects in Europe have, I think from last year to this year, have slowed down and our perspective on that is that, it is likely a macroeconomic situation as opposed to a very specific, market specific situation.

Richard N. Nottenburg

The other thing I want to add is that from a product roadmap perspective, we are still investing in that space. In fact, we've got some interesting additions to what we already currently sell, I think what’s important in that space for us is that we put together some pretty significant scale installations, both the Carphone Warehouse and the J-Com as proof points in the market. And I think this is more we can do in that space. But I think at the same time, we have decided that this year was going to be a year, we would focus a lot of our investment firepower in the session border, what I would call the session management space. And I think that’s really, we talked about $20 million in the last call, and I think we'll continue to execute with that strategy.

James Falkoff – Robert W. Baird & Company

Okay and maybe just kind of a follow-up related to that. You guys talked about providing some metrics to kind of track your different product categories. Do you have any updates there? Is there any timeframe we can look at for kind of this disclosure?

Richard N. Nottenburg

I think, we don't have any specific updates on this call, but I think in the second half of the year, I think we can give you some more color on how we think about the business. Obviously, we don’t break it out in a segment perspective that way, but we are taking a very careful look at how we think about at the business, and as those thoughts become much clearer, we will certainly give you updates.

James Falkoff – Robert W. Baird & Company

Okay. That would be great, looking forward to it. Thanks.

Operator

Thank you. Our next question is a follow-up question coming from the line of Ted Jackson from Cantor Fitzgerald. Please proceed with your question.

Edward Jackson – Cantor Fitzgerald

I wanted to hear a quick set of commentaries from you relative to what’s going on with NT, and if that might perhaps create any opportunities for Sonus? Secondly, I'm curious on a strength-to-weakness basis, if you could have discussions on that relative to geographies? And then lastly, touching base on the prior question and the voice over broadband market and slowness of development, could we infer from that that things with BT perhaps have developed a little bit slower than you might have thought a year ago, and that’s it from me. Thank you.

Richard N. Nottenburg

Thank you for your follow-up, I will take the NT question. I think the way you have to think about the Sonus business, we have been in business here for almost, at least I think a decade. I think that our value proposition has been replacing legacy TDM class four. We've done that quite well. In fact, if you look at the total of our customers where they have completely taken out DMS 250s and DMS 100s, we are very good at that. I don't think our value proposition has changed, and I don't think really it’s still there. In fact I, it is enhanced because we have a competitor whose is now much more impaired than they were before, but I view in this way, I kind of view that I don't really know what the disposition of those assets are going to be. And we focus on our business, what we have been doing all long, which is basically continue to basically replace legacy networks, and our value proposition is very strong. Guru, you may want to take the question on.

Guru Pai

On BT, right so that as we continue to work very closely with BT, and what is most important is BT is satisfied that we have met our deadlines and commitments at our existing agency targets right. However, BT is a very dynamic customer, and as such can change their requirements to reflect changes in market demand and changes in the overall economic outlook. But what's important is that the scope and scale of our BT AGCF project has changed, and we continue to work with BT to assess the impact of it on both our business and their business. And specifically about BT's plans, my suggestion again is, you should probably go directly to BT and talk to them about any public statements from they may want to make.

Edward Jackson – Cantor Fitzgerald

Fair enough, and then how about the geographic discussion?

Guru Pai

Again, from a geographic perspective, like we saw on the last call, the markets that have been impacted the most by the macroeconomic conditions, I think for us, have been Eastern Europe and parts of the developing world that have materially slowed down their plans that they may have had for network build out. As usual, we continue to stay very strong in North America and in Japan and Western Europe seems like a important growth opportunity for us as does certain segments of Middle Eastern Africa.

Edward Jackson – Cantor Fitzgerald

Thanks.

Operator

Thank you. (Operator Instructions). Our next question is coming from the line of Ari Bensinger from Standard & Poor's. Please proceed with your question.

Ari Bensinger – Standard & Poor's

Yes. Thank you. I'm just following up on a previous question. You stated that your current guidance assumes no change in the economic environment, but I am wondering if you could touch upon your assumption for the telecom CapEx market given that industry wide telecom spending in Q1 seemed overly depressed relative to full year guidance and a lot of people are looking for material pick up in spending as the year progresses. Is this something that you’re looking for as well based on your conversations with customers?

Richard N. Nottenburg

I don’t have any number to give you for what CapEx is going to be for 2009. But I do think it is depressed. I do think that CapEx as a function of sales of revenues, which may be running at 14% or 15% so this is going to come down a few points. But at the same time, one size doesn't fit all when you look at CapEx because it depends upon what network you’re in, what's the type of equipment you’re selling, what are the deployments of and really what are the revenue generating activities that you’re supporting? And I think that what I view as more as a capital reallocation issue rather than the balance issue for our customers. I think that's kind of how we look at it in. It may stay somewhat subdued for a while, but I don't really have a crystal ball here to kind of predict that. I just think we manage our business appropriately for the environment that we are in.

Ari Bensinger – Standard & Poor's

Thanks. And just can you give guidance on your CapEx for the year?

Richard J. Gaynor

That's not a number, Ari that we put out in the past. So I think the answer is no. We do continue to invest fairly significantly in the quarter. Our CapEx in Q1 was a little lower in the $700,000 to $800,000 range than it traditionally is, but I don't see any real change in our investment in CapEx going forward.

Ari Bensinger – Standard & Poor's

Fair enough. Thank you.

Richard J. Gaynor

Thank you.

Operator

Thank you. It appears that we have time for only one more question. That question is coming from the line of Paul Silverstein from Credit Suisse. Please proceed with your question.

Paul Silverstein – Credit Suisse

Hi, I've actually got several, but they are clarifications. First off, just to your commentary about BT, I understand you don’t want to go into a specific customer but from your commentary is it fair for us to conclude that the path that you are previously on, it’s not better but it’s different and not better?

Richard N. Nottenburg

Yes, Paul, you're right. I believe that's a fair assumption.

Paul Silverstein – Credit Suisse

Okay. Let me move on. Secondly, I know historically the response has been, there has been definitional issues but I trust, maybe I missed it, you still haven't provided the SBC revenue number, correct?

Richard N. Nottenburg

That is correct. And again, and Paul, let me reiterate that as we said we don't have a SBC product the way the market defines it.

Paul Silverstein – Credit Suisse

I understand. Rich, with respect to the, beyond the macro issues that you and everybody else are wrestling with, historically you’ve spoken about the cut over from traditional, it sounds, funny to use that word in connection with Voice-over-IP media gateways, but from traditional gateways to SBCs, hence the $20 million you are investing in the session border controller market, can you give us some more insight in terms of that migration, how fast you see that occurring. What you see putting aside industry analysts, but what you see as what's left in terms of legs in the traditional voice over IP market, versus the growth path for SBCs?

Richard N. Nottenburg

So let me just say the following things. That is really a good question. And I think that let me parse it in the following way. There are a still a substantial number of TDM ports that need to be replaced in market, period, that are going to get replaced on a time scale, which you and I and others can speculate on. So that is obviously we don’t have a crystal ball as to when it is going to happen. I think as far as IP peering is concerned; I think that's an interesting market, because that’s a market that’s reflective of a change, right. And the first change is basically the change for how you interconnect what I call disparate networks and disparate media. And I think the market has a got of legs. And that’s why we made a pretty significant investment, and I'm happy to have Guru expand on why, but I think that we are pretty jazzed about the market and about the opportunity. We think we have got a good initial starting point and I think there are more things that we can do in this market, Guru, you may want to…

Guru Pai

Sure. And Paul, the way I'd like to answer that, I think again that’s a great question. I think it’s fundamental to how we see our place in that inside of telecom topologies. We fundamentally, our basic value proposition into many telecommunications operators is to help them lower their cost of operating and offering voice and session management services. So, we fundamentally help them go from TDM to IP and the preponderance of networks today are still TDM. And we believe that that sustainable value proposition to move to IP stays and will persist for quite some time to come. What happens is interestingly, as endpoints in other networks, as we create those islands, the need to interconnect them off the same infrastructure and the same asset base that they have deployed becomes an important value proposition that we provide to our service provider customers, and that they expect from us in terms of an evolving and going forward product road map. Additionally, as voice islands start to get created in the enterprise or large portions of subscriber Access base, we'll continue to evolve our product portfolio to help our service provider customers, again, go after those segments profitably and in a very competitive manner. So in order to reiterate, I think our basic value proposition that we brought many years ago in terms of Voice-over-IP, I think we are augmenting it with IP-to-IP communications, we see that as a normal and natural evolution of telecom networks.

Paul Silverstein – Credit Suisse

Okay. One last question if I might. I recognize you are not in a position to give us a session border controller number for various reasons you have gone into, but would it be possible for you to provide us with how many of your customers are using your media gateways in not just a traditional TDM-to-IP gateway, but in that, in the context of an IP-to-IP session border controller?

Guru Pai

We don't have that specific number right now, but in terms of guidance I would say yes if certainly I would say, a majority of our customers are doing that.

Paul Silverstein – Credit Suisse

All right. Are there customers, I think the answer certainly has been yes, are there customers, the customers that are just deploying your media gateway as a session board of control.

Guru Pai

Again not as a classic session border controller, but there are customers where our NBS product has been deployed largely to provide IP peering. I wouldn't say just from a nature of our architecture, it’s almost never sold.

Paul Silverstein – Credit Suisse

Guru, I’m sure if I understand you, but I just want to make sure 1 understand relative to what we’ve been told historically. And this, I think predates your arrival at Sonus, but if I go back in history, I believe that we were told that your word, Sonus was selling as in SBC to what within non-Sonus customers, i.e., that there were customers that were not using Sonus’s traditional media gateway, media gateway controller that were taking the platform as an SBC. But I hear you are saying not the case.

Guru Pai

Okay. Just by the nature, again I don’t want to go often at times, but it’s not, we sell our products with a whole sequence of other products. It’s not just a, we don’t fit that classic as we see models. So we sell an entire solution. There are solutions that we sell for IP peering, but we don’t sell a session border controller, we don’t sell the MBS as a classic stand-alone session border controller. We sell it with the rest of our products that go with it.

Paul Silverstein – Credit Suisse

Okay. All right. Thank you for the answer. I appreciate it.

Operator

Thank you. Mr. Roy I will now turn the call back to you. Please continue with your presentation or closing remarks.

David Roy

Thank you operator. That does complete this morning's financial results conference call. We would like to thank you all again for joining us, we appreciate your interest in Sonus Networks. And operator could you please provide our callers with the replay instructions again.

Operator

Thank you. Ladies and gentlemen if you would like to hear the replay of this call, you may do so by dialing the toll number 1-402-977-9140. I repeat again, the toll number is 1-402-977-9140 or the toll free number 1-800-633-8284, 1-800-633-8284 and the reservation number is 21421887; the reservation number again is 21421887. Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.

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Source: Sonus Networks, Inc. Q1 2009 Earnings Call Transcript
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