I wrote a blog yesterday entitled, National Broadband Plan and Stimulus—A Secular Boom For Occam Networks. The catalysts I described in the blog that prove so positive for OCNW over the next few years foretell a very different outlook for others, particularly Sonus Networks (NASDAQ:SONS).
In simplified terms Sonus makes the telecom gear that connects the traditional circuit switched network to an IP network, allowing for traditional voice to be transported over a packet based network (VoIP). It’s more complicated than that, but this is a big picture piece and that’s the big picture.
The issue for Sonus, amplified by yesterday’s National Broadband Plan, is that the world may be moving to an all IP network a lot faster than everyone had imagined. And if your job is to bridge a two network world (one voice and one data), then you had better find a new job and soon. Yesterday’s plan set in motion the conversion of the Universal Service Fund from supporting traditional voice opex, to supporting broadband capex. And after 10 years the government will only support IP. If the most rural carriers are running an all IP network in 10 years, you can bet the larger service providers will be as well. The FCC has essentially drawn a line in the sand for the PSTN and the clock has started for Sonus.
The Writing Was on the Wall
The predicament that Sonus finds itself in today was elegantly outlined by Andrew Schmitt in his post on this site several years ago where he concluded that Sonus was carrier VoIP 1.0 and Acme Packet (NASDAQ:APKT) was carrier VoIP 2.0.
I give him his due because I argued fairly strongly against his opinion at the time. My thesis was that Sonus owned the customer relationship with large carriers and that would allow them to sell through the migration and shift their mix from media gateways to Network Border Switches (Sonus’ session border controller with a lot of extra stuff, making it a bit kludgy compared to Acme’s SBC—a little like Calix’s C7 platform relative to Occam’s sleeker BLC 6000) over time. However, for whatever reason (I won’t speculate) Sonus seems to be losing their largest customer relationships and hence their ability to gracefully transition with the industry. BT terminated the AGCF business and AT&T revenues have dropped off a cliff and rumours abound that AT&T is rethinking their future network design.
The Struggle All Legacy Vendors Face--Going Up the Down Escalator
It is a classic struggle that Sonus is now entering (grow the new faster than the old declines...). You just have to look at ALU, or TLB or (gulp) NT to see how difficult it can be. Sonus’s revenue is about 10% IP to IP related with the NBS. But that doesn’t change the fact that 90% of current business (if you believe that the world will be all IP in a decade) will go away in the next ten years. The company has just announced a new platform that they will be rolling out based upon their NBS, but using a more distributed architecture. It sounds like a bit of a hail marry, but Sonus does at least have a lot of R&D in the area, so who knows. But even if it is successful, it has to eventually make up for 90% of current business and then show growth on top of that for Sonus to once again be a compelling investment story. That is a big ask.
SONS the stock
The company has a lot of cash on the balance sheet (over half of their market capitalization) and they are not burning cash. So there isn’t a lot of reason to think the shares will come under any material pressure. Some might think that if the downside is limited, now might be a good chance to take a flyer on the new platform being a big success. I will sell the balance of my position into this strength. For Sonus shareholders prosperity has always been just a little bit further.... But for the reasons I outlined above, I think Sonus will again deliver all stick and no carrot.
Disclosure: Still own a small amount of SONS