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Sonus Networks Inc. (NASDAQ:SONS)

Q4 2009 Earnings Conference Call

February 25, 2010 4:45 PM EST

Executives

Lucy Millington - IR

Richard Nottenburg - President and CEO

Wayne Pastore – VP and Interim CFO

Guru Pai - EVP and COO

Analysts

Paul Silverstein – Credit Suisse

George Notter – Jefferies

Ted Jackson – Cantor Fitzgerald

Catharine Trebnick – Avian Securities

Operator

Welcome to the Sonus Networks fourth quarter and full year 2009 financial results conference call. At this time I would like to remind everyone 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 Lucy Millington at Sonus. Please go ahead, Ms. Millington.

Lucy Millington

Thank you, operator and good afternoon everyone. Welcome to Sonus Networks fourth quarter and full year 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 Wayne Pastore, our Interim Chief Financial Officer, who will both address you shortly. Also with us is Guru Pai, our Executive Vice President and Chief Operating Officer. Guru will be available to answer your questions when our prepared comments have concluded.

Before we get started, 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 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 and statements are neither promises nor guarantees and instead are just predications and involve various risks and uncertainties such that actual events or financial results may differ materially from those we’ve forecasted.

As a result we can make no assurances that any projections of 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 just filed annual report on form 10-K, which is 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 of any other subsequent date. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so unless required by law.

Please also be reminded that due to our sale of Zynetix subsidiary in the fourth quarter of 2008, the results of Zynetix have been classified as discontinued operations in our statements of operations for 2008. So they would 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 certain GAAP and non-GAAP financial measures within the meaning of SEC regulation. A reconciliation of the non-GAAP to comparable to GAAP financial measures along with our earnings press release is available in the Investor Relations section of our website at www.sonusnet.com.

A recording of this telephone call will be available until March 11, 2010. The instructions for accessing this recording and a replay of the webcast will be available on the Sonus Networks Investor Relations website. Please visit www.sonusnet.com About Us, Investor Relations for details.

I’d now like to turn the call over to our CEO Richard Nottenburg. Please go ahead, Rich.

Richard Nottenburg

Thanks, Lucy. Good afternoon everyone, thank you for joining us on the call today. Before I turn to our results, I like to formally congratulate Guru Pai, our Chief Operating Officer and Wayne Pastore, our Interim CFO on their new roles with Sonus. Since joining Sonus as Senior Vice President and General Manager in December 2008, Guru has made important contributions to our company in sales, product development and overall go-to-market strategy.

As we enhance our new product initiatives and increase our efforts to become an innovator and category leader in the IP to IP communications space, Guru’s keen understanding of our markets and customers needs will be instrumental to our success. I’d also like to welcome Wayne Pastore to the call. As our Vice President of Finance, Corporate Controller and Chief Accounting Officer since May 2008, Wayne knows our numbers very well. Over the past two years, Wayne has played a critical role in strengthening our internal financial controls, building a strong finance organization and improving our financial reporting processes. At the same time, he has helped us reduce costs and enhance the quality of our balance sheet. We have the utmost confidence in Wayne’s ability to oversee the financial operations of the company and I am pleased to be working with him in his new role.

Now I’d like to turn to our results. We are pleased with the progress we made in 2009, not only a challenging year for Sonus but our industry as a whole. Despite that we were profitable on a non-GAAP basis for 2009 and exited the year with over $414 million of cash and investments on our balance sheet and our book-to-bill ratio was greater than 1 for the year.

In 2009, we successfully reengineered Sonus. In doing so, we created substantial operating leverage while at the same time adding 19 new customers including a Fortune 50 Enterprise Account and adding new talent to drive innovation and thought leadership. We also created a new product platform and a roadmap of new products and service offerings, some of which we plan to introduce this year and from the investments we made in our IP peering and session border control solutions, we have nearly doubled our revenues from our Network Border Switch products.

During 2009, we continued to extend our leadership in the hybrid trucking market by expanding our customer base, executing on expansion projects with our existing customers and growing our NBS revenues; our NBS revenues grew from $15 million in 2008 to $24 million in 2009. We were also successful in winning a major contract with a tier 1 top ten global carrier using our Network Border Switch. This win validates our differentiation in delivering SIP based carrier interconnect requiring both signaling and media interworking running on the same session border controller.

In addition, we made significant progress in the enterprise sector. We won a multimillion dollar contract with a Fortune 50 customer that extends voice-over-IP capabilities from within the enterprise to IP peering points at the carry edge. Sonus provides the signaling and median to working and a centralized routing solution that allows calls to be routed both on the ingress and egress of their network. This capability drives significant cost savings, call center efficiency and aids in disaster recovery.

We believe that both our existing products and the products we will develop using our next generation platform will offer significant value to the enterprise market. During 2009, we announced new customer relationships with innovative service providers such as Cox Communications, CITIC 1616, Hypercube and KDDI Global. We expanded our footprint within several high growth traffic accounts including Neutral Tandem and IntelePeer.

I am also pleased to announce that we have won significant business with a major tier 1 North American local exchange carrier. They were a 10% customer for Sonus in Q4 2009. We are proud to have been chosen as their provider to develop their new IP voice network core, which will allow them to realize significant cost savings by bringing together CDM and IP traffic from their desperate – disparate networks.

Our other 10% customer in Q4 2009 was U.K. service provider BT. The work Sonus undertook as part of the BT AGCF project has successfully concluded and all outstanding requirements have been delivered. We continue to work with BT on other projects.

In all, we added 19 new customers during the year, up from 11 in 2008 that added nearly 20% to our bookings in 2009. We are winning business both in our traditional carrier space and in the enterprise space.

Now I’d like to discuss our go-forward strategy for 2010. As we reengineered and transformed Sonus throughout 2009, I discussed with you some of the market drivers that would guide our R&D investments and our go-to-market approach. I gave you a preview of our strategy to grow revenues and reestablish ourselves as a category leader in the IP to IP communication space.

Our industry is at a strategic inflection point. As service providers and enterprises move toward offering and increasing number of IP to IP multimedia services, we see a significant growth opportunity. We believe our next generation IP to IP communication platform, which I mentioned earlier, will allow us to capitalize on this opportunity. We will begin launching products based on this platform midyear 2010.

We designed our new product platform to enable both operators and enterprises to offer new multimedia IP services more efficiently by using a distributed architecture at the network edge.

Our new platform integrates call control, service logic, packet processing and security into a single cost effective network element. This is a high performance multi-environment platform that leverages a throughput of multicore network processors to perform intensive packet processing on microcode along with off-the-shelf general purpose processors. The platform will serve as the foundation for our forthcoming products and solutions supporting three key strategic market initiatives.

First, we will create products that lead the industry in scale, performance and reliability for IP to IP session management targeted at service providers, enterprises, and channel distribution. Second, we will invest in creating solutions and ensure service continuity across 2G, 3G and 4G broadband wireless networks while enabling operators to maximize reuse of their deployed assets. In addition, we will bring out solutions and enable Internet-based and carrier-hosted services to interwork in a converged fixed, mobile and Web 2.0 world. An integral component of our wireless strategy will be investing in distributed standards based IMS platforms and services that exceed and outperform current solutions at a much lower cost point.

Third, we will leverage the performance of this platform to deliver solutions that allow for policy based control of IP services and flows. This will empower service providers to create new services and controls and enable them to maximize their returns from existing and new traffic on networks in which they have heavily invested. We will continue to keep you informed as we execute our strategy and bring to market these exciting products that leverage our new platform.

Finally, we will continue to invest and extend our leadership in our core products and service offerings. Our NBS and GSX family of products continue to differentiate us in the market and provide us with a competitive advantage. We will also be rolling out products in the network monitoring and control space. These products and service offerings will help our current and future customers manage and grow their networks in a seamless manner. Sonus has more than a decade of experience in helping carriers roll out some of the largest voice-over-IP installations in the world and these products harness that experience and enable significant OpEx savings for our customers.

We believe that our TDM-to-IP business is stable and there are growth opportunities that are existing and new customers and in new markets and new geographies. In 2010, we again see the opportunity to grow our NBS product revenues faster than the market. While our overall visibility still remains limited, we are more optimistic about the business environment than we were a year ago. The business has stabilized and the actions we took in 2009 positioned us well for profitable growth. In 2010, we expect to achieve flat-to-low single digit percent revenue growth.

The decisions we made in 2009 helped us create a strong foundation we have today. We right-sized and realigned our business while continuing to invest in our product roadmap, new products leveraging a next generation platform and talent. We are more efficient and more productive with substantial operating leverage built into the business and we continue to win new customers.

At Sonus we have a valuable portfolio of innovative solutions, strong customer relationships and some of the best employees in the industry and thanks to their successful execution along with the strategic investments we have made in the business, we were profitable for 2009 and exit the year in a more competitive position.

My goal is for us to be a leading innovator and [sonic] category leader in the growing IP to IP communication space providing high demand solutions that carries enterprise’s need to be successful in today’s increasing competitive telecommunications market. I am confident that we have the right plan in place to achieve our goals.

Our new product and service offerings will change the way service providers manage their networks and enable them to provide their customers with services faster and more profitably. Now that we’ve successfully reengineered the company and refocus on innovation, we are poised to recapture our heritage of technology leadership.

I will now turn the call over to Wayne to review our financials in detail.

Wayne Pastore

Thank you, Rich and thanks for the kind words. Good afternoon everyone. Today I’ll review our financial results and then provide our expectations for Q1 and outlook for full year 2010. Before I get into the financials, I’d like to make a few general comments.

As Rich said, we are pleased with our finish to 2009. Our results continue to reflect our strong financial discipline throughout the business. While 2009 was a challenging year, we delivered on our commitments to manage costs and generate solid gross margins, which further strengthened our balance sheet in a difficult economic environment. In fact, we significantly overachieved on our cash expectations generating over $26 million during the year, then with cash and investments of approximately $414 million.

Please note that our financial results can vary significantly from quarter to quarter; so as always, we encourage you to evaluate us on a longer-term basis.

With that I’ll begin my review of Q4 and then move on to select full year 2009 financial information.

Revenues for the fourth quarter were $68.7 million, up 22% from $56.2 million in Q3 2009 and down 23% from $89.5 million in Q4 of 2008. As a reminder, I’d like to point out that our Q4 2008 results reflected revenue of $21.3 million from T-Systems. Given the size of the deal is low margin profile, it had material effect on both our revenue and gross margin for Q4 2008. Our overall book-to-bill in the quarter was above 1 and our product only book-to-bill was less than 1. Our product only book-to-bill on a full year basis was above 1.

There were two customers that contributed greater than 10% of total revenue in the fourth quarter and they were BT and a major tier 1 North American local exchange carrier. Our top five customers represented approximately 58% of revenue in Q4, up from 49% in Q3 and essentially flat with Q4 of last year. We reported revenue from 87 customers in the fourth quarter compared to 89 in the third quarter and 82 in Q4 of 2008. For the full year 2009, we had 95 revenue generating customers compared to 98 in 2008.

Looking at revenue geographically, domestic revenue accounted for 65% of revenue Q4 versus 66% in Q3 and 40% in Q4 of 2008. On an annual basis, domestic revenue was 70% of total revenue in both 2009 and 2008. Taking a look at the full year, total revenue was $227.5 million, down 27% from $313.1 million in 2008. While this was obviously a difficult year particularly in the first half, our performance was in line with our expectations.

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

Non-GAAP gross margins for the fourth quarter were 67% of revenue compared to 64% in Q3 and 46% in Q4 2008. The unusually strong margin performance in Q4 2009 was a result of the recognition of $16 million in revenue from the completion of the BT AGCF project. Excluding the BT AGCF margin contribution, the overall gross margin for the quarter would have been approximately 60%, which is within our long-term guidance range.

Product gross margin for the fourth quarter were 75% compared to 70% in Q3 and 49% in the same period last year. Excluding the low margin T-Systems transaction, product gross margin would have been 66% in Q4 2008. Service gross margins were 49% compared to 55% in Q3 and 40% in Q4 of last year. Again, excluding the low margin transaction in 2008, service gross margins would have been 51% in Q4 of last year.

Total operating expenses for the fourth quarter was $35.3 million, down from $47.6 million in the fourth quarter of last year but up slightly from $34.7 million in Q3. The increase in Q4 OpEx is due to expected high year end commissions offset by other savings in OpEx resulting from our continued cost containment initiatives. Total OpEx was $141.3 million for the year, down 24% from a $187 million last year, which is consistent with our efforts to realign our operating expenses to our market opportunities.

Looking at our headcount, we ended the year with 879 employees compared to 864 employees at the end of Q3 and 991 employees at the end of 2008. The increase in headcount in Q4 is reflective of our ongoing investment in research and development initiatives. As Rich mentioned earlier, we have continued to balance our cost reduction initiatives with strategic investments in R&D while growing our competitive position, but we are confidence that we have the right level of resources and the right expertise to support our product roadmap.

There are a couple of selected financial topics relating to our balance sheet that I’d like to expand upon. Overall, we ended the quarter with total cash, cash equivalents, marketable securities and long-term investments of $414.1 million further improving our already strong balance sheet. We indicated in the last call that we expected our cash balance in the fourth quarter to be above $385 million. We exceeded our expectations primarily due to strong collection performance, improved inventory management and pricing disciplines.

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

At the end of the year total deferred revenue was $100 million, up from $83.4 million in Q3 and up from $79 million in Q4 of last year. AT&T deferred revenue was $30.9 million in Q409, down slightly from $33.9 million in Q3, and up from $24.4 million in Q4 2008.

Now providing some insight on 2010. We expect to achieve flat-to-low single digit percent revenue growth for 2010. Our 2010 gross margin is expected to be used in our longer-term target range of 58% to 62%. While we have volatility within quarters, we do believe this to be a good planning assumption on a rolling 12 month basis. Total operating expenses are expected to be in the range of $142 million to $146 million for the year, up from $141 million in 2009. This increase is mainly attributed to the continued investment in new products and platforms that Rich highlighted earlier.

We expect operating expenses in Q1 to range between $36 million and $38 million. We expect first quarter ending cash and investments not to drop below to $405 million. We expect our cash and investments not to drop below $390 million for any quarter of 2010. Basic share counts for Q1 should be approximately 275 million shares.

So to quickly sum it up, we delivered another solid quarter and we are pleased with the progress we made during the year. We enter 2010 with a strong balance sheet and an operating model, that’s a lower breakeven point allowing for enhanced leverage. Our commitment to delivering innovative products and solutions in 2010 should position us for a future growth and profitability.

With that let me turn it back to Lucy.

Lucy Millington

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

Question-and-Answer Session

Operator

(Operator Instructions) In the interest of time we ask that you limit yourself to only one question and one follow-up. And your first question comes from the line of Paul Silverstein from Credit Suisse. Please proceed with your question.

Paul Silverstein – Credit Suisse

Rich, I was hoping to ask about both the North American carrier site as well as the new platform you cited with respect to session border control. Can you give us any incremental insight on the new platform? I think you mentioned it’s mid 2010. So I think it hasn’t shipped yet, you’re not generating revenue yet. Do you have any customers already lined up for that? Any insight in terms of the complexion of that product relative to the current NBS platform? As I understand from what you said, it sounds like it’s a brand new platform, it’s different than what you’ve been shipping historically.

And finally related to this, any incremental insight – I know it’s hard forecasting, but as you look at your session border control where you are in the marketplace, any incremental insight in terms of what we can expect revenue wise? And the corollary finally, I apologize for the multi-part, would be by implication if you’re expecting SBC to grow, you’re expecting your legacy or your current VoIP business to decline, I guess based on the guidance. Would that be accurate?

Richard Nottenburg

On the easiest part of the question with respect to the customer, the [LEC] – we’re not at liberty to disclose that right now, we don’t have permission to do that. So we would have done that if we could have. I think with respect to the platform, I’ll let Guru to go into more detail, let me just kind of give you kind of a highlight. I mean the overview is the platform is not just designed for running in SBC because we already run in SBC on our GSX platform and Guru will give you more details on that. The platform is designed for a whole range of new products, which are going to roll out over the next 18 to 24 months and some products will appear – will start rolling out on that platform midyear 2010. So kind of like, I mean I just wanted to kind of clear up that for a moment.

With respect to our existing business I think that the way you should bifurcate the business or think about the business is as follows: The peering business, right, or sessions business, which runs on the GSX platform, the SBC – on the GSX probably has an all IP environment, that business nearly doubled year on year, I gave you the numbers for that. That business is going to continue to grow this year faster than the market and faster than the market leader, okay. I mean that’s where we have visibility to.

With respect to “our hybrid trunking business”, which is extremely strong by the way, because as I told you, and just now is that we actually now select as a result of the Q4 win so forth and so on, that business actually is quite a good business and it’s very strong. The issue is in that business is that that’s more of a replacement business right, that’s depending more on the macro environment that we’re in and so we have a little more uncertainty in that business. On the other hand we see opportunities to expand that business in both in new geographies, new customers, new markets and by the way, we’re actually selling that independent of the NBS into the enterprise right now. We’ve already scored millions of dollars in the enterprise with respect to that product line.

So, I mean from my point of view, media gateways, they’re going to be around for a long time and in fact we do things that you can’t do that you couldn’t even do on our new platform right, because I’ve got a TDM capability. But I’m going to let Guru to go into more details with respect to the new platform and timing and product.

Guru Pai

Again, I’m going to answer a couple of pieces of your question that I think Rich didn’t answer. So the first one is our NBS platform and more precisely our hybrid trunking platform, we expect that gives us a competitive differentiator in the marketplace and we expect it to stay that way for quite some time, and that’s very specifically is a platform where we provide both TDM and IP to IP communications on the same platform specifically off of the GSX 9000 and hardware.

Our new platform is specifically targeted towards IP to IP communications. Like Rich said, SBC is just one element and one elemental full of functionality that we will provide off that platform. We will be building applications that allow us to deploy those platforms into a variety of different marketplaces with different service providers, both wireline and wireless into the enterprise and into channels. A comment that we have made on our product portfolio in the last has been that our generic products that we have built off of the GSX family weren’t that well suited to sell into the channel market directly; that’s another issue that we solved with our new product platform.

You’re right, our first product instantiation on the new platform will show up in the marketplace somewhere midyear 2010 and we anticipate subsequent product launches and product announcements into a different market and carrier assignments going forward going into the next 18 months from there.

The next question that I had written down was the revenue impact of it. We expect 2010 to be far more of a bookings year with the new platform than a revenue year. Obviously just given the nature of the telecom industry and vis-à-vis having customers lined up and so on, I think that’s a little premature for us to answer. We build these things typically in concert with market requirements and so on. And when we’re ready to make product announcements we’ll do that in a much more robust fashion.

Richard Nottenburg

The other, Paul is, that I mean think of the following way, Paul, we wouldn’t build a new platform and make the level of investment that we made in this platform just to attack the SBC market; SBC market is interesting. Our NBS, yes, they told you before, we nearly doubled revenue year-on-year, but we’re going after something larger. I just came back from 3GSM. We think we got a big opportunity with voice over LT; we have big opportunity by enabling customers who reuse their 2G and 3G assets. And I’ll just tell you something that we didn’t tell – I didn’t put it in the release but we did do a small acquisition of space recently, small mobile acquisition of assets, which we’ll talk about more perhaps in the future.

So we are very interested and we’re going to use our experience in call control, what we know how to do here in the voice over LT market. We think that’s a very, very big opportunity for the company; it builds our heritage, it will leverage our intellectual property and so the platform we have is going to be the foundation for the company for the next four years, five years. This is a big investment, this is a big thing for us.

Paul Silverstein – Credit Suisse

Hey, Rich, with respect to the new platform and I understand it’s not coming out for a little bit, it’s 18 months to 24 months, there’s various variance coming out, but are you in trials or do you have any customers that have lined up for commitments and to trial the product?

Richard Nottenburg

We’re not right now in a position to talk about that, Paul, and we are going to provide you updates in a timely fashion. We got a lot of things going on with that platform right now and obviously, with the first application and we will give you updates – frankly, we’ll give you updates on future calls, but I’m extremely bullish on the progress we made so far.

Paul Silverstein – Credit Suisse

Thank you.

Richard Nottenburg

Thanks, Paul.

Operator

Our next question comes from the line of George Notter from Jefferies. Please proceed with your question.

George Notter – Jefferies

Hi, thanks very much. There was another question, I think Paul asked that. I would love to have you guys touch on. It was just the puts and takes on the 2010 guidance that, flat-to-low single-digit growth. Obviously, the NBS stuff is growing. I would imagine there’s differences according to different marketplaces you’re serving. Certainly you’ve got the new customer coming in with the ILEC like in North America. What elements of the business are offsetting or declining relative to those areas that are growing? A puts and takes discussion would be great. Thanks.

Richard Nottenburg

Yes, this is not a question of one business declining and another business increasing; it’s a question of visibility into one business and a lack of visibility into another business. We’ve got very nice visibility into our NBS business, which we are growing – that business is growing quite nicely and in fact, as I talked about, what we did year-on-year, we expect this year to that business to continue to grow fast than the market and fast than the market leader.

The other business that we’re in, which is very strong and we’ve got some significant deals, which are in the funnel, but as I told you all on the last three or four conference calls, in this environment this becomes an ROI equation. We want to people to replace legacy. That’s an OpEx for CapEx decision and we have less visibility there. And that less visibility basically is sort of the right sort of the, what I call the cornerstone of [which drove the] guidance.

Now if during the year, some of those deals start to pop right, and we start to see some of that CapEx becomes available and we start to see how things changed from a macro point of view, and this is more macro, it’s not a competitive issue, then obviously we will change our guidance. But right now we don’t have the visibility to give guidance with respect to the integrated piece of both businesses beyond what we have done right now.

So beginning of the year a lot can happen and a lot happens in Q4. I just don’t have visibility into the back end of 2010.

George Notter – Jefferies

Got it. And then just as a quick follow-up, on the Network Border Switch appliance platform that you’re building, you won a new enterprise customer here. It sounds like more of the focus is going to be not just carrier but also enterprise. I mean can you talk about how you intend to sell into the enterprise? Is it an indirect distribution model? Are you going to have direct sales? It’s not a marketplace that Sonus has historically addressed and so I guess I’m trying to figure out how you’re going to market the product. Thanks.

Richard Nottenburg

That’s a really great question. I’ll let Guru expand on my answer. First let me say that with respect to the NBS and with respect to our next-gen platform with the first substantiation of the SBC ran on that platform, there’s going to be no part of this market that we’re not going to look at. I mean we’re going after this market, we’re going to go after it very, very aggressively. We’re going to go after the carrier market, which we’ve been in; we’re going to go after the enterprise market. And by the way we’re going to also use, we’re also working with our carrier customers to basically resell us in that market. We’re also working with – we’re going to work with infrastructure partners and we’re going to work with other types of partners in our market to drive sales in this market. This is going to be an aggressive campaign because we believe we’ve got something with enormous strategic differentiation because we cover the full range of applications both in the carrier space and in the enterprise space.

As far as the enterprise space is concerned right now, we have won, as I said in the call, a Fortune 50 but actually it’s better than the Fortune 50 customer here, millions of dollars in revenue already scored in this account and I will tell you that this is an area that we think is a substantial amount of opportunity for us both with our existing products and with the new platform, possibly a new platform.

So, I think you’re going to see a different Sonus, as I told you on the last couple of conference calls, we knew that the way to grow this business without blowing your blowing up our SG&A was to go ahead and use partners. We are very aggressively doing that right now. In fact I would say in our first enterprise sale, we were working with a partner, we just can’t announce that partner, but we do have a partner for that sale.

Guru Pai

George, this is Guru. Again, very specifically, I would not adjust our OpEx model for us to go after that revenue in the enterprise space. Our primary vehicle to get to the enterprise market through our traditional carrier customers and only selectively is through our direct sales and services team. Our current portfolio products, both that are in our current portfolio as well as stuff that we contemplate going forward are all sort of similar R&D investments to the basic profiles. It’s not like we are building enterprise specific products and building an enterprise specific distribution model that would alter our sales and marketing expense line.

George Notter – Jefferies

Got it. Thank you.

Operator

Our next question comes from the line of Subu Subramanian from Sanders Morris. Please proceed with your question. Please go ahead, Mr. Subu Subramanian.

Richard Nottenburg

Maybe he’ll dial back in.

Operator

We will continue with the next one. The next question comes from the line of Ted Jackson from Cantor Fitzgerald.

Ted Jackson – Cantor Fitzgerald

Thank you very much. I’d like to touch base just on AT&T. So my first question with regards to AT&T is that if deferred revenue from AT&T actually ticked down sequentially, is it fair to assume that you didn’t book any new bookings, if you would, from AT&T during the quarter? Could you give us an update kind of on just what’s going on at AT&T and do you see any recovery business with AT&T in 2010 or is that part of the reason for some of the decline?

And then just again on to 2010, it’s my understanding that how the revenue scores is that you should have kind of a relatively larger fourth quarter and then it will fall off again. Maybe should we be thinking of less modest contribution from AT&T in 2010, I guess this is the end question. What happened in the quarter and what kind of contribution should we think of as we think about 2010?

Wayne Pastore

Hi Ted, this is Wayne. So I’ll take the part about the deferred revenue. So, as I mentioned on the call, deferred revenue for AT&T did end up $30.9 million. We did obviously book new business from AT&T and we did recognize revenue from AT&T. So, I think the $30.9 million is kind of within the range of where AT&T has been over the past 12 months. That revenue because of the Rev Reg rules is all now in short term and we are expecting that to be recognized over the next 12 months at a ratable fashion.

Ted Jackson – Cantor Fitzgerald

Given the fact that it went down, I mean it’s fair to assume that the – you’re not generating enough business out of AT&T to refill the pot of deferred revenue and I guess is that a trend that we – would we expect this to kind of continue going forward? Would we expect it to kind of just sort of tread water as we think – when you’re thinking about modeling for 2010, are you expecting that a portion of your deferred revenue to just to kind of tread water, go down?

Wayne Pastore

So, Ted, the deferred revenue balance did go from $24.4 million in Q4 of ‘08 to the $33.9 million in Q3 of ‘09. I agree we did have a little of a drop in Q4 but I don’t think that’s necessarily indicative or what we are expecting in the future quarters.

Richard Nottenburg

Let me just kind of add to it. I mean AT&T is a very strong customer here, but we have a very strong relation with AT&T. There’s a lot of opportunity at AT&T but as I mentioned on prior calls, a lot of the focus of AT&T in terms of their CapEx spend has been really on wireless backlog, I mean this is all in their transcripts and things that they need to do in terms of their priorities. Clearly, we’ve got a lot of opportunity at AT&T and I’m not in a position to forecast AT&T for 2010. We certainly feel very good about them as a customer.

Ted Jackson – Cantor Fitzgerald

So you hate the iPhone.

Richard Nottenburg

Excuse me, I’m sorry.

Ted Jackson – Cantor Fitzgerald

I said so you hate the iPhone.

Richard Nottenburg

No, I actually love the iPhone, it’s a great device. I use it, I think it’s great.

Ted Jackson – Cantor Fitzgerald

I’ll step out of line, just one quick sort of follow-up is I missed – you made some commentary relative to book-to-bill for the fourth quarter and I missed that commentary.

Wayne Pastore

So, our book-to-bill for the quarter was above 1. Our product only book-to-bill was a little bit less than 1. Our product only book-to-bill for the full year was above 1.

Operator

It appears that we have time for only one more question and that’s from Catharine Trebnick from Avian Securities. Please proceed.

Catharine Trebnick – Avian Securities

My question has to do with the new products, but not so much of the product or perhaps products that you will be announcing with that, but the technologies that you see driving that development in 2010 and 2011 such as perhaps policy control, SMS over LTE, SIP routing protocols. Could you give me some flavor as to some of the technologies that you’ve designed the product to?

Guru Pai

Sure. Hey Cath, how are you?

Catharine Trebnick – Avian Securities

Yes, I am very good, sorry. You know I’d ask that, so –

Guru Pai

I know, so we have a prepared answer for you. The reality is, let’s take it at a variety of levels, right, so like Rich said in his script the two elements that we’ve inherently built on the platform, one is that we will be doing in terms of packet processing and then we’ve got general purpose computing that we can run applications on. In addition, I think our company has historically been extremely strong in doing transcoding and media interworking and we expect all these three generic elements to play fundamental roles in the network of the future especially when you’re doing IP endpoint communications.

So when you start looking at – there’s basic IP element call control elements that have been sort of instantiated as session border controllers and sort of the most rudimentary implementation of IP to IP networking. On top of that obviously policy management is a very key element in establishing calls in the future.

And then the next set of things that without doing an actually product announcement here, Cath, is we will be interworking media and interworking signalling across the variety of different demands. So that’ll be from mobile networks to landline networks, in between disparate mobile networks and between disparate mobile applications all on that same platform.

And I think so when you start looking at it, when you start looking at any form of communication that has IP endpoints whether those endpoints are mobile endpoints, landline endpoints, we expect to be able to treat them, process them and give the operators the degree of control that they need to offer services on.

Catharine Trebnick – Avian Securities

All right. That helps a lot, I appreciate it. Then I just have a basic housekeeping question. Wayne, could you restate how many shares you were expecting outstanding for fourth quarter? I didn’t catch that.

Wayne Pastore

The fourth quarter or first quarter?

Catharine Trebnick – Avian Securities

First quarter. Thanks, sorry.

Wayne Pastore

Approximately 275 million shares.

Lucy Millington

Thank you, Catharine. Operator, do we have anyone else queued up for questions?

Operator

There are no questions at this time.

Lucy Millington

In that case that concludes Sonus Networks fourth quarter and full year 2009 financial results conference call. We would like to thank you all again for joining us and we appreciate your interest in Sonus Networks.

Operator

Ladies and gentlemen that does conclude today’s conference. The replay for this conference call will be available to you in one hour from now. You may access the replay by dialing 1-800-633-8284 or 402-977-9140 and enter program ID number 21458243. We thank you for your participation and ask that you please disconnect your line.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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