Sonus Networks, Inc. Q3 2009 Earnings Call Transcript

Nov. 9.09 | About: Sonus Networks, (SONS)

Sonus Networks, Inc. (NASDAQ:SONS)

Q3 2009 Earnings Call

November 9, 2009 4:15 pm ET

Executives

Lucy Millington - IR

Richard Nottenburg - President and CEO

Rick Gaynor - CFO

Guru Pai - SVP and GM

Analyst

Paul Silverstein - Credit Suisse

James Falcoff - Robert W. Baird & Co.

George Notter - Jefferies

Greg Mesniaeff - Needham & Company

Ted Jackson - Cantor Fitzgerald

Catharine Trebnick - Avian Securities

Operator

Welcome to the Sonus Networks Third Quarter 2009 Financial Results Conference Call. (Operator Instructions).

I would now like to turn the conference over to Lucy Millington at Sonus.

Lucy Millington

Welcome to the Sonus Networks Third Quarter 2009 financial results conference call. Thank you for joining us today.

With me on the call this afternoon are Richard Nottenburg, our President and Chief Executive Officer; and Rick Gaynor, our Chief Financial Officer, who will address you shortly. Also with us Guru Pai, our Senior Vice President and General Manager. Guru will be available to answer your questions when our prepared comments have concluded.

Before we get started, I'd 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 Sonus Networks' 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 various risks and uncertainties, such as 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 events or financial results to vary from these forward-looking statements, please refer to the risk factor section of our most recent Annual Report on Form 10-K and on our quarterly reports on Form 10-Q for the first three quarters of this year. These are on file with the SEC.

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 or revise forward-looking statements at some point, we will specifically disclaim any obligation to do so unless required by law.

Please also be reminded due to the sale of our Zynetix subsidiary in the fourth quarter of last year, the results of Zynetix have been classified as discontinued operations in our statement of operations for 2008. So they will be excluded from any discussion of our operating results for the fiscal 2008 period.

Finally, please note that during our call we will be referring to GAAP and non-GAAP financial measures. A reconciliation of the non-GAAP to comparable GAAP financial measures along with our earnings press release is available in the Investor Relations section of our website, sonusnet.com.

A recording of this telephone call will be available until November 23, 2009. The instructions for accessing this recording and a replay of the webcast can be found on the Sonus Networks' Investor Relations website. Please visit www.sonusnet.com, About Us, Investor Relations for details.

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

Richard Nottenburg

As I am sure you have all seen in our press release and 10-Q filing, we have delivered another solid quarter with what remains a challenging market environment for many telecom infrastructure suppliers. While our business will continue to experience quarterly unevenness, I am pleased to report that this quarter we saw a strong uptick in bookings and exceeded our gross margin metrics.

We achieved these results while reducing our operating expenses, increasing our investment in new products and strengthening our cash position. As we exit 2009, we are better positioned to deliver earnings growth with positive operating leverage now built into the business. Let me quickly recap our Q3 numbers.

Revenue was $56.2 million for the quarter compared to $62.2 million for the same period last year and down approximately 9% from Q2 2009. Our non-GAAP operating expenses were reduced from $50.9 million in Q3 2008 to $34.7 million this quarter. Our non-GAAP operating income was $1.2 million for the quarter compared with a non-GAAP operating loss of $10.9 million in Q3 2008 and non-GAAP operating income of $6 million in the prior quarter. Our book-to-bill ratio was above 1 and we ended the quarter with a strong cash and investments position of $394.2 million with no debt.

Although we haven't seen any material shift in the spending patterns of our core customers, the environment has continued to stabilize somewhat and carriers are willing to deploy CapEx for the right short-term return on investment. Our RFP activity continues to be healthy and we remain confident that we are strongly competitive in our core markets.

Within our traditional customer base, we continue to extend our leadership in the Class 4 market with both new tier 1 wins and expansion projects with our existing customers. Our relationships, reputation and position in this sector remains strong. During the quarter we reported Global Crossing and Softbank as 10% customers. The scalability, flexibility and reliability of our solutions continues to make Sonus the supplier of choice for network deployments that require TDM and IP interconnect.

We continue to make good progress with our Network Borders Switch. We have significantly expanded our footprint in a major tier 1 service provider to include our NBS as part of its global network. They chose Sonus due to our section border control features, scalability, reliability and the significant operating efficiency provided by the Sonus PSX policy management and routing solution. The architectural advantage of our hybrid TDM and IP platform resonates well with service providers where scale, networks multiplication and operating cost reductions are the primary decision drivers.

While we are confident in our current roadmap and solutions, I want to share some market insight and the resulting paradigms that will direct our research and development initiatives and drive our new product introductions over the next 36 months.

Firstly, service providers recognize that the systems and software required to manage IP-based voice calls will need to evolve to support all session types, not just voice, but media sessions in general. The same service quality, reliability, ubiquity and associated networking customer operations that exist in today's circuit switch networks will need to be supported in tomorrow's multimedia networks.

These session management solutions need to bridge the carrier and Internet domains and span both fixed and mobile networks. These network and domain boundaries will begin to blur with the rollout of 4G networks and the growing importance of peer-to-peer and web-based services.

Secondly, the emerging area of IP-to-IP interworking will continue to increase in complexity as the shift to IP drives the need to support the ever-increasing combination of signaling and protocols, security features, media interworking and transcoding technology.

Finally, the need for hybrid networks and the interworking of this parent TDM and IP networks for both signaling and media will continue. As the number of IP islands increase and vast portions of the world's infrastructure especially classified and mobile networks remain TDM, the need for media gateway technology will persist for some time to come.

In today capital-constrained environment, the need to leverage existing network assets, drive OpEx reduction and facilitate graceful migration will determine vendor selection. We see this theme across all market segments from fixed to mobile and from carrier to enterprise. The equipment providers that resonate with this theme for network transformation are the most likely to succeed in this market.

For example, the challenge of the this parent multi-protocol multi-vendor networks is a significant pain point for large enterprises seeking to affect the migration to IP and SIP-based networks in a scalable and highly reliable fashion. We have been working with some early adopters and thought leaders in the enterprise segment who are using our solutions to help them homogenize their TDM and IP assets by implementing centralized routing and policy management across the network, including unified least cost routing algorithms.

These solutions will enable them to significantly reduce network complexity and operating expenses. We see an opportunity for our current and future portfolio products for those large enterprises that require and demand similar levels of scale, resilience, robustness and security as our carrier customers. We currently see it as an adjacent market that we will primarily support through our carrier customers and partners and only selectively through our direct sales and service teams.

Over the last 12 months, we made significant progress against a set of priorities I laid out in 2008. The important changes undertaken in 2009 together with a strong operating cadence have provided a framework for us to be more competitive and accelerate innovation. This new company footprint coupled with a significantly lower breakeven point and a strong balance sheet gives us the capability not only to invest in organic growth, but look at other compelling opportunities to deliver greater shareholder value.

We have significantly reshaped the company during the market downturn, have attracted world-class talent and continue to hire key personnel to drive innovation and grow our business. I am pleased that Kumar Vishwanathan joined our executive team in August as our VP of Engineering and Chief Architect, and he is already making a positive impact on our development organization.

In addition, I want to thank all Sonus employees worldwide for their continued dedication to the success of our business as we retool the company. We have a great team working at Sonus, a team we'll continue to invest in.

The market may continue to be volatile in the near term, but we have weathered the economic conditions of 2009 and will exit the year a stronger business with a stable financial footing focused on delivering high value solutions for our customers.

I will now hand the call over to Rick to review the financial results. Then we'll be happy to take your questions.

Rick Gaynor

As Rich said, we are pleased with our Q3 results. Before I go into those results in detail, I'd like to point out that this quarter, due to internal scheduling conflicts, we were unable to hold this call when we released our financials last week. Next quarter we will get back to our normal process. Please also note that our financial results can vary significantly from quarter-to-quarter. So as we always do, we encourage you to evaluate us on a longer term basis.

Revenue for the third quarter was $56.2 million, down 8.8% from $61.6 million in Q2 2009 and down 9.7% from $62.2 million in Q3 of last year. Our overall book-to-bill in the quarter was above 1 and our product-only book-to-bill was above 1 as well. For informational purposes, our product-only book-to-bill on a year-to-date basis was above 1.

There were two customer that contributed greater than 10% of total revenue in the third quarter and they were Softbank and Global Crossing.

Looking at revenue geographically, domestic revenue accounted for 66% of revenue versus 78% in Q2 and 81% in Q3 2008. This shift reflects the presence of our Japanese customer Softbank as a 10% customer in the quarter.

Our top five customers represented approximately 49% of revenue in Q3 compared to 42% in Q2 and 58% in Q3 of last year. In the third quarter, we reported revenue from 89 customers, including two new customers, flat with the second quarter and up from 86 in the third quarter of 2008.

Before I go into further detail, I would like to point out that these are non-GAAP numbers that exclude stock-based compensation and amortization of intangible assets in both 2008 and 2009. These non-GAAP numbers also exclude restructuring expense in 2009 and expense from earn-out settlement related to our Zynetix acquisition, litigation settlements and the results of discontinued operations in 2008.

Non-GAAP gross margins for the third quarter were 63.8% of revenue compared to 66.3% in Q2 and 64.4% recorded in Q3 2008. Product gross margin for the third quarter was 70% compared to 70.9% in Q2 and 69.5% in the same period last year. Favorable product mix and continued disciplined pricing enabled us to continue to generate product gross margins in the 69 to 70% range.

Service gross margin was 54.6% compared to 59.7% in Q2 and 56.9% in Q3 of last year. Deployments in product and service margins I just described resulted in a solid 63.8% overall gross margin in Q3, which is again above our long-term gross margin target range of 58 to 62%.

Total operating expenses for the third quarter were $34.7 million, basically flat with $34.8 million in the second quarter and down substantially from $50.9 million in the third quarter of last year. Overall, our operating expenses were flat quarter-over-quarter, mainly as a result of a short-term increase in project-related professional fees, offsetting the savings from our mid quarter Q3 restructuring activities. At $34.7 million, total OpEx was below the low end of our previously announced forecast range of $37 million.

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

As you can see, we continue to make good progress aligning our operating expenses to our market opportunities. During the quarter, we announced the last of our planned restructuring events for 2009. As a result of our ability to execute against our plan for the year, in Q3 we again generated non-GAAP operating income as well as improved our cash position.

Looking at our headcount, we ended the quarter with 864 employees compared to 933 employees at the end of Q2. While we were transitioning work to more cost effective geographies in the first half of this year, there was some temporary duplication to avoid gaps in our R&D schedules whose actions in August have addressed. As we went through this process, our goal was to ensure that we had adequate resources to meet product roadmap deliverables and develop new products. Although we have reduced headcount, we will continue to balance strategic investments with our goal of operating as leanly and efficiently as possible.

At the end of Q3, we had 227 employees approximately 26% of our total headcount in our Bangalore facility supporting our drive for lower overall expense levels. This is up substantially from nearly 11% in the same period last year.

We ended the quarter with cash and marketable securities of $394.2 million, above our guided range of between $370 and $380 million. The main reason for cash coming in above guidance was strong cash collection performance in the quarter, which included a significant customer payment that came in earlier than we had anticipated. To give you insight on the health of our accounts receivable balance, approximately 88% of our customer AR balance is current and less than 2% is greater than 90 days.

On our last few calls, we talked about the timing of our AT&T revenue. As the result of a two-year maintenance contract renewal and the applicable accounting revenue recognition rules, orders we book and ship with AT&T each quarter get deferred and subsequently recognized on a pro rata basis from the point-of-sale through yearend 2010.

At the end of the third quarter, total deferred revenue was $83.4 million, up from $82.5 million in Q2. Of that total, AT&T deferred revenue was $33.9 million compared to $33.5 million at the end of last quarter.

Now looking forward, at the beginning of the fiscal year, we communicated that we expected FY '09 to be within but at the lower end of our targeted 58 to 62% gross margin range. Based on the favorable product mix and strong cost controls implemented, we now anticipate that we will be at the high end of that range for the year.

We expect operating expenses in Q4 to be between $33 million and $35 million. Therefore, total operating expenses are expected to be in the range of $139 million to $141 million for the year. Based on our year-to-date performance and current outlook, we now believe we will be able to report a cash balance above $385 million at yearend, well above the low watermark we had previously discussed. Basic share count for Q4 should be approximately 274 million shares.

In summary we were pleased with our Q3 results. While revenue was down moderately from Q2, deferred revenue was essentially flat. We exceeded our expectations for the quarter in gross margin, OpEx reductions and cash generation. We believe that the actions completed to-date have positioned the company to be more competitive as we exit 2009 and create the opportunity for positive earnings leverage and continued investment in innovative product technologies as the market recovers.

With that, let me turn it back to Lucy so we can start your questions.

Lucy Millington

Thanks, Rick. Operator, could you please provide our callers with instructions on how to ask a question, please?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Paul Silverstein with Credit Suisse. Please go ahead.

Paul Silverstein - Credit Suisse

Rich, is there anymore insight you could offer on the IMS product? I know it's something you all haven't spoken about in a while, but other products that address the shifting trends in the market, including perhaps your future server, I think is the ASX platform and maybe the IMX as well, or anything else you think is relevant that speaks to Sonus's ability to execute against that shift in the marketplace?

Guru Pai

If you look at how we look at the marketplace, right, we've got products that fit the core transport segment and the Class 4 market and we also have products, like you said, the ASX and the IMX that address what we call the access products. So we are pretty competitive in that space. We have IMS compatibility across that segment and we work with solutions that we provide that are end-to-end Sonus, as well as trying to work within the context of IMS architecture provided by third-parties as well.

Paul Silverstein - Credit Suisse

Is there any quantitative metrics you all can offer us? Going back to the NBS, has that yet broken 10% of revenue? I know you mentioned on the call you've got a tier 1 that either started deploying or is committed to deploy the product. Anything you can offer us in the way of metrics on both the NBS and any other platforms you care to speak to with the ongoing shift in the marketplace?

Guru Pai

As you know, we don't break out product specific revenues here at Sonus. To give you some more information, at least by giving you a little bit more color of what's happening in the marketplace, a substantial portion of our proposals and RFPs now contain the NBS as part of our response and part of my sales team's engagement, but both our current and new customers.

So I like where we stand. I think the NBS is an inherent part of our hybrid networking strategy. We think a very large portion of our customer base have both TDM and IP networks that they have in place. I think the hybrid options that we give them certainly help them simplify their networks, make them far easier to operate and help them with that migration of IP.

Richard Nottenburg

Let me add something. The other thing is that we spent this year about $16 million in rough round numbers on our NBS platform. We've obviously spent a lot of time focusing on TDM and IP, now we're spending a significant amount of time on IP-to-IP interworking. I think that over time you will see some significant progress here in the kinds of solutions we bring out to market.

Obviously, we're not making a conference call into a product announcement session, but what we like to try to do is try to lay out the strategy by how we see the market evolving and how we basically will evolve our product strategy from TDM to IP interworking to IP-to-IP interworking. You're going to hear a lot more about that in the next couple of calls as we start to roll things out.

Paul Silverstein - Credit Suisse

I'm not asking for the technical specs or anything of that nature, but again just trying to get some more insight. My last question on the topic and I understand you don't want to give too much information, but can you at least share with us number of customers that have committed to the platform at this point or number of new customers or is it something you can share with us in the future?

Guru Pai

I think we have a couple. Obviously, we did refer to a tier 1 in the call, and if we could have announced that customer, I think we certainly would have announced that customer. To be honest with you, I think over time you'll see some more significant customer announcements like that when we can make those announcements. Clearly, the investment profile has been very significantly skewed towards the NBS, and obviously, towards IP-to-IP interworking. I think you're going to see a lot more news out of the company over the next couple of conference calls.

Guru Pai

As you understand, the NBS is a software running on the hardware platform where we have a lot of shared components. So this makes it inherently difficult for us to take that out and report it as a separate line item. I understand that it's great information that's necessary to evaluate us, but it's the inherent nature of the architecture that makes it difficult to separate. It's also an inherent part of a hybrid network, which is part of our strategy, that separating it out is probably not the right thing to do for us at this time. As we have said earlier, we'll try to give you more color as to the extent that we can on exactly how we're performing in the marketplace.

Paul Silverstein - Credit Suisse

I'll ask one question off the NBS before I pass it on, but just to make sure I understand relative to your last comment, the NBS you sell as a software license on a perceived basis, I guess, on a subscriber basis, would that be correct?

Guru Pai

Yes, I think we sell it on a session basis.

Paul Silverstein - Credit Suisse

Let me ask you a non-NBS question and I'll pass it on. Pricing environment, in terms of the traditional voice-over-IP, media gateway marketplace. I think you made some brief comments on the call, but any additional insight there you could share with us?

Richard Nottenburg

I think that one of the things we found out (inaudible) last 18 months is that we are extremely competitive in the market. In fact, if you look at it, Sonus does get quite a nice premium for the intellectual property that we bring to the products we sell in the marketplace. I do think that obviously the market is heavily segmented into different parts, which are the low end and the high end.

Clearly, there are places in the market where our solution set doesn't play. We've been very disciplined here really to go after the business, which not just brings in good gross margin dollars, but also brings in what I consider contribution margin. What that means is we're not spending a disproportion amount of R&D chasing opportunities in the end, which don't generate operating earnings. So I think that I'm very comfortable we are in the market, but at the same time I will tell you that there are parts of the market where some of these deals can be quite not attractive for us, particularly in geographies where the feature set and the capabilities that we present are not needed at the current time.

Paul Silverstein - Credit Suisse

A clarification on AT&T, with the 97.2 changes that I think have now been put into effect, will that change the way you record the revenue going forward?

Rick Gaynor

We haven't made a conclusion on that yet. We're just trying to understand the new regs that they are rolling out and working with our auditors on that. We obviously wouldn't be adopting until January 1, 2011, which is after this particular accounting treatment kind of unwinds with AT&T. So, for the duration of this year and next year, you should expect to see the same treatment as we currently have.

Operator

Our next question comes from the line of Ken Muth with Robert W. Baird & Co.

James Falcoff - Robert W. Baird & Co.

It's James Falcoff on for Ken. I just wanted to dig a little bit deeper into the uptick in bookings that you referenced. Can you maybe provide a little more color there, break it down in terms of new versus existing customers and regional highlights, applications, et cetera?

Rick Gaynor

The biggest change you would see directionally in the quarter was more international versus domestic. That is really just a factor of the fact that Softbank has now scored in the quarter for us. That was a piece of business that was in deferred revenue, build in deferred revenue since the back end of 2007 and was on our balance sheet in Q4 of last year. So that scored out and that really skewed the domestic-international split for the quarter.

We did indicate that we had two new customers. We can actually announce that one of them is HyperCube, the other one we don't have permission to name at this point in time. We had 89 customers, which is basically flat from the prior quarter. Concentration of the top 5% is 48%. In Q2 of '09 it was at 42. Same period last year it was 58. So we tend to track at about the same concentration level of about low 50s for the top five customers.

Guru Pai

I think our bookings were disbursed pretty equally across products, across our customer segments, I think there was strength across the board. There wasn't any particular pattern again that I would point to. So it was fairly broad based.

James Falcoff - Robert W. Baird & Co.

Since you mentioned Hyper Cube, I mean it seems to be pretty successful area for you, the independent [TAM] providers here in the US. Can you just talk a little bit about that area and is this a model that you are developing more outside of the US also?

Guru Pai

It's an interesting question and I think it's a very important segment for Sonus. I think we've actually helped create that segment and help it thrive. Part of what's going on, I think if you look at the general shift in voice origination and termination, as there's been shifts from traditional wireline networks to wireless networks and even to off net traffic that goes to the Internet, a lot of that traffic gets aggregated at this point in the Class 4 and in the wholesale business. We've seen players who participate in that do reasonably well and experience traffic growth because they are again pretty decent aggregation point for that traffic.

We supply equipment to them. We understand that market extremely well. It's part of our heritage and we help them in aggregating traffic, whether it's TDM traffic or IP traffic. It's part of our traditional peering market and I think that's a position of strength for us. Clearly, that wholesaling business has got a little bit to do with geographies and the size and scale of networks. We're particularly strong in North America. I think Europe is an emerging market, but certain carriers are beginning to participate in the wholesale market there in a larger and larger basis. We're pretty strong in that segment in Japan and parts of Asia as well.

Last point on that is that that traffic mix it not just TDM, right? A lot of that traffic is now going to become IP in terms of peering with networks, and that again is a reiteration that our hybrid strategy in that marketplace is probably the best architectural fit for them.

Richard Nottenburg

The other thing I would add is that that peering is not just going to be other wireline networks, but will be with wireless networks also. In terms of a strategy for us, in terms of supporting that market vertical, that market segment, that's something that we really focus on doing very well here.

James Falcoff - Robert W. Baird & Co.

Just a clarification on Softbank, I don't know if you can give this, but is this a multiphase rollout, so we should maybe expect to see them reemerge in the 10% list again in the future here?

Guru Pai

I think our expectation is that we want to leverage the work that we've done. Softbank, as Rick said, is a deal that scored that was building in deferred for some time now. Basically when we recognize revenue it means that we finished a particular project and have been able to score revenue for it. We intend to leverage that project obviously into other opportunities there and they are a good customer of ours. We have a good relationship with them and we certainly intend to work with them in the future.

Operator

Our next question comes from the line of George Notter with Jefferies. Please go ahead.

George Notter - Jefferies

I wanted to ask you about the gross margins, obviously better than you thought this quarter. You mentioned favorable product mix, what exactly was behind that? If you could give us more color that would be great.

Guru Pai

The first part on the product side, I think when you say product mix, we've had a lot more software content that our customers have purchased from us last quarter. I think that helps from a GM contribution perspective. Also, a lot of that came from growth as well in the network, which again is favorable product mix for us. Finally, an important point is that our professional services content as a portion of total revenue goes up and we've had a special effort to make sure that we manage our cost of services in that element well enough that our gross margin on services increases as well. I think if you put all that in, sort of the net effect of it is an increase in gross margin for us.

George Notter - Jefferies

As a follow-up, the software piece, is that the NBS, the higher mix in software content or is there some other software that I should be looking at?

Guru Pai

The NBS is certainly an element of it, but we have quite a few software elements that go into our solutions or operators.

George Notter - Jefferies

You mentioned services. I know the business has a significant requirement on interoperability work. I know that many deals require product customization from a software perspective. If I could go back to roughly a year ago when Richard joined, I think you guys were talking about trying to push some of those costs back on to the customers and try not to do those [gratis] for folks. Has that effort been successful and is that part of what's driving the services margin here or should I be focusing on something else in particular?

Richard Nottenburg

I think that there are a couple of elements here. One is I think Guru has done a very good job with Matt Dillon in terms of how they've actually managed the service business in terms of just managing as a business. I think they've done a very nice job in terms of improving things, better cadence about how you operate the business.

I think the other thing, of course, is that if you look at that business in general, yes, we have to do customization, if that customization is important to do. I think that what we've done is we've done a better job here in terms of basically getting to a better balance between what we pay for and what our customers pay for to make sure we have a win-win situation with both our customers and shareholders and for our company in general. So I think we've just done a better job of managing that over time. I would say directionally it's definitely going in the right direction for us.

Rick Gaynor

A lot of that development effort actually would have been in R&D, not in the services organization itself, and will probably be part of the reason why we've been able to control our R&D spend so well over the last year. Not only is it what customers are willing to pay for, but I think equally important is what we don't need to do because the customers were not willing to pay for. So when push came to shove, I think previously we were doing work that was perhaps expensive to us but of marginal value appreciation for the customer, and now when we say we need the price for that, they say, well, we actually don't need that feature.

Richard Nottenburg

I think the other important thing here is that even if you get paid for doing custom work, one of the things that we've tried to do here over the last year and a half is to get this to be a much more market-focused company. Clearly, if you do a lot of custom work and if it takes your engineering talent away from focusing on the product roadmap, then you're really not generating what I would call a market-driven company. I think that the key thing here is focus on the market, focus on making sure we generate innovative products and innovative service offerings that we could basically put growth back into the business.

It's really hard to do that if you have a significant number of your engineers working on doing a lot of custom work, which really becomes a distraction from the roadmap. With that being said, we're in a business which does require us to do custom work. I think what we've done is we've achieved a much better balance here over the last year and make sure we can execute on the product road map whilst we basically satisfy a lot of our customers' custom requirements.

George Notter - Jefferies

Just as a follow-up, the Softbank revenue coming through this quarter, did that come in at above corporate average margins? Is that a piece of the story here in the Q3 margin performance?

Rick Gaynor

We never break out margins at a customer level, but I would say it was generally in line with our normal expectations for gross margin.

George Notter - Jefferies

For Q4, I think you are guiding to the higher end of your range, but should I assume these same kinds of trends stay in place in Q4 or is there something else to play a higher revenue number? What else should I be thinking about?

Rick Gaynor

I think we've given you a model which is between 58 and 62 and we are not changing our model here in terms of how we look and view the business. I think we've been fairly consistent with that.

Richard Nottenburg

The best we can help you with on that one, George, is that 58 to 62 is our long-term range and we said we expect to be at the high end of that range at the end of the year.

Operator

Our next question comes from the line of Greg Mesniaeff with Needham & Company. Please go ahead.

Greg Mesniaeff - Needham & Company

Rich, I was wondering if you could give us a quick synopsis of your session border control or product roadmap and whether you see it evolving more along the carrier lines or the enterprise lines, and finally, who may be partnering opportunities?

Guru Pai

At the risk of not trying to repeat some of the stuff that I've said earlier on the NBS, I think IP-to-IP communications is a critical market for us, both in terms of peering, that is a network interconnect piece of this, which has historically been our set of sweet spot, and then we're expanding sort of the utility of how our assets can be deployed and include the access piece of IP-to-IP interworking, which in the marketplace we will call on the access session border control side.

We will continue to increase the number of deployment options that operators have. Like Rich talked about in his prepared statements, there are certain large enterprises and there are certain other private network situations that exist that look very much like service providers to us and they have their own set of unique communication requirements. Part of the IP-to-IP networking space is the need to interconnect protocols, to do protocol interworking at a signaling layer as well as doing media interworking, which is trying to make sure that sessions are transcoded and that the actual media type from one part of the network reaches the other part of the network with fidelity.

We intend to invest around both those vectors. Over time, we see that as a market that continues to evolve, there will be more and more media types, more and more protocols that exist and that will be an investment theme for us. How we instantiate that into our actual products, I think will take some time and we'll actually do product announcements when it's appropriate.

Richard Nottenburg

The way I view the market is I think if you look at the entire space that we talk, we talk broadly about in terms of the IP peering business, our NBS, as we look at this market I kind of see this, for this company, as a fat pitch coming down the plate. I really do. We've got the intellectual property here. We've got a lot of intellectual property that we can leverage and we can generate some very exciting products here without a disproportion spend in R&D. Those are the kinds of things that we've been looking for here to be able to get products out, which leverage our intellectual property, leverage $0.5 billion in R&D to spend over 10 years, so that we basically can generate operating earnings here. Given the fact that that market has at least $1 billion of gross margin pull, we're going to go after it. I mean, that's what we're going to do here. So I'm feeling good about what we're doing here in that regard.

Greg Mesniaeff - Needham & Company

You see basically concurrent carrier and enterprise product lines emerging from this?

Richard Nottenburg

Guru put it very nicely. I think a lot of the enterprises that we've looked at, at least to me that I've been in personally and Guru has been in personally, is a lot of these enterprises have the similar requirements that our carrier customers do. Clearly, we're focused on those. I think we've made some progress here. To the extent that we can partner with some of our carrier customers to essentially deliver product to the market, those two things blend very well together.

Operator

Our next question comes from the line of Ted Jackson with Cantor Fitzgerald.

Ted Jackson - Cantor Fitzgerald

I wanted to talk a little bit about visibility and maybe beat the enterprise dead horse a bit more. Well, it's not dead, so opportunity. With regards to visibility, I'm kind of curious. Your commentary suggested that perhaps the spending environment that you are facing is loosening up and getting a little bit better. The quarter was solid. Your book-to-bill was above 1 in all fronts.

I guess the question is, first of all, when you came into the quarter how much of that quarter did you have in backlog, or flipping it around, like how much of your quarter was kind of book and ship and were there any trends changed in that relative to, say, the last couple of quarters? Looking forward when you are thinking about your fourth quarter, I know you aren't giving revenue guidance, in terms of how you are thinking about your own business expecting to see a fair chunk of that quarter come out of backlog or just how much visibility do you have into your business is what I'm asking in sort of a forward quarter basis?

Rick Gaynor

We did tell you book-to-bill was greater than 1 and a new data point that we gave this quarter which we will give going forward is product book-to-bill, which we think might be a little bit helpful to you. In terms of what comes out of backlog usually are maybe the inverse. Booked ship for us in an individual quarter fluctuates quite a bit, but I think a good rule of thumb is about a third right now is running as deep ship and the rest comes out of backlog. So obviously, we're trying to replenish our backlog as we use up the other two thirds out of backlog.

Richard Nottenburg

In terms of how we see the market and how I try to couch in terms of my frontend comments, the way I see the market is the markets operate in the following way, is that projects basically which got funded let's say in 2007 or let's say the early part of 2008 and had a payback let's say of two years, those projects may not be funded right now. The payback on a lot of projects have to be basically much shorter than two years. The reason for that is because you're still on a low ROI environment and I think for a lot of carriers its difficult to deploy a significant amount of spend in terms of replacing things which essentially are working.

As time goes on that will start to loosen up because they will have to replace elements in the network as some of these elements basically have maintenance problems, other types of issues and also basic pure capacity. I think we're in a low ROI environment. Yes, the business has stabilized but stabilized at a lower level. That being said, I think we've also done a very good job, essentially we picked up some new customers and we continue to basically drive the business within the TDM to IP space where we really are strong. For example, we early alluded to the market for Neutral Tandem and so forth, those types of customers.

I think that visibility still remains limited, but yet again the business seems to be stabilizing at a lower revenue level. That's where essentially we've taken our expense structure down, commensurate with where we thought the business might have leveled off, so we can start to print quarters which essentially are in the black and to fund our product roadmap from the P&L rather than funding it from the balance sheet.

Ted Jackson - Cantor Fitzgerald

It's not a fair question, but I'm going to ask it any way. When you think about the fourth quarter and beyond, first of all, do you think that you will be able to put up revenue growth on a sequential basis in the fourth quarter, and then as we think about 2010, is there a chance we should thinking about the business in terms of normal seasonal pattern?

Richard Nottenburg

There's a lot of uncertainty around Q4 around whether this is going to be seasonal type Q4, we really don't know right now. There was a lot of speculation whether there was going to be another budget flush. You're in a lot of those conversations. You ask a lot of our customers those questions. I don't really have a lot of great insight into that other than to say I think we're still operating in an environment which is somewhat capital constrained.

I think as far as next year is concerned we really don't know right now. I think what we've done is we've essentially reengineered the company, reshaped the company, so we exit the year more competitive. Our balance sheet is certainly pristine. I'm very, very satisfied with the product roadmap. I'm satisfied with what's coming out of the next 18 months, next 36 months. We're getting that we're (inaudible) more competitively and that's what we can do. We've got the company positioned so that if there is an uptick next year, certainly we should see some significant positive operating leverage in the business.

Ted Jackson - Cantor Fitzgerald

On the enterprise effort, I was a little surprised to hear you all talk about making a move on that front. My question is, are you making that move because you are having your carrier customers come to you and ask you to do it?

Richard Nottenburg

Let me just say, we're making a move because what we see is we're getting pull from the market in certain areas. Again, if you look at a lot of these large enterprises, the requirements are small to medium size carriers. I think that this is an excellent opportunity for us to partner with our carrier customers to deliver some very, very effective solutions to the market. I think this is a story that's going to evolve over the next couple quarters and I think we'll have more to tell you as the story evolves.

Operator

It appears that we have time for only one more question. It comes from the line of Catharine Trebnick with Avian Securities.

Catharine Trebnick - Avian Securities

My question is could you give us an update on your OEM strategy. A year ago, Guru, you discussed perhaps that you were looking at more partners, but at the same time you were constrained because of the way the product is built. Where are you on that?

Guru Pai

That's a great question. We are actively pursuing the strategy of disaggregation. As you rightly pointed out, a lot of it is there's an engineering effort involved to disaggregate our product set, which is again a path that we're continuing on. We're talking to partners, both OEM partners as well as channel partners, to help us in our distribution model. Especially as the world moves to IP and a lot of the transactions that are going on in the marketplace right now, I think the need to partner in this industry for anyone, especially someone like us, becomes more and more important. We continue to have that dialogue.

There's got to be value on both sides, both the OEM partner side as well as our side, to actually effect an acceptable agreement. We continue to talk to these people across-the-board. I think those assets, from our perspective, in the past historically Sonus has been, like you said, an end-to-end solution. We look to make sure that as networks evolve and they become more and more open that we actually start working with other network equipment players to actually interwork with them.

Catharine Trebnick - Avian Securities

On the enterprise side, I know last quarter or it was the quarter before, you introduced or announced the Avaya partnership. Are there any other partnerships that you are working on in the enterprise that you can announce yet?

Guru Pai

No, there aren't any that we can announce yet. Again, the Avaya discussion was not a partnership, it was more of an interoperability. We don't have a distribution agreement with them.

Lucy Millington

That does complete this evening's financial results conference call. We would like to thank you again for joining us and we appreciate your interest in Sonus Networks. Operator, before we leave could you provide ore callers with the replay instructions please?

Operator

For a replay of this conference, you may dial 800-633-8284 or 402-977-9140 and you may enter the reservation number 21441087.

Ladies and gentlemen, that does conclude today's Conference Call. We thank you very much for your participation and we ask that you please disconnect your lines. Have a wonderful evening, everyone.

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