Sonus Networks, Inc. Q2 2010 Earnings Call Transcript

| About: Sonus Networks, (SONS)

Sonus Networks, Inc. (NASDAQ:SONS)

Q2 2010 Earnings Call

August 03, 2010 04:45 pm ET

Executives

Fran Murphy - IR

Richard Nottenburg - President & CEO

Wayne Pastore - CFO

Guru Pai - EVP & COO

Fran Murphy - VP, Finance

Analysts

Paul Silverstein - Credit Suisse

George Notter - Jefferies & Company

Catharine Trebnick - Avian Securities

Natarajan Subrahmanyan - SMH Group

Greg Mesniaeff - Needham & Company

Todd Koffman - Raymond James

Operator

Welcome to the Sonus Networks Second Quarter 2010 Financial Results Conference Call. 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)

At this time, I would like to turn the conference over to Mr. Fran Murphy, Vice President of Finance at Sonus for opening remarks and introductions. Please go ahead, Mr. Murphy.

Fran Murphy

Thank you, Mohamed, and good afternoon everyone. Welcome to Sonus Networks' second quarter 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 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 or statements are neither promises nor guarantees, and instead are predications based on management's current beliefs and involve various risks and uncertainties, such that actual events or financial results may differ materially from those we have forecasted.

As a result, we can make no assurances that any projections of future events or financial performance will be achieved. For a discussion of the important risks that could cause actual events or financial results to vary from those forward-looking statements, please refer to the Risk Factors section of our most recently filed quarterly report on Form 10-Q, which was filed today 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 specifically disclaim any obligation to do so unless required by law.

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 GAAP financial measures, along with our earnings press release is available in the Investor Relations section of our website found at www.sonusnet.com under the heading Financial Documents and subheading Second Quarter 2010 reconciliation of non-GAAP and GAAP financial information.

A recording of this telephone call will be available until August 17, 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 would now like to turn the call over to our CEO, Richard Nottenburg. Please go ahead, Rich.

Richard Nottenburg

Thank you, Fran. Good afternoon, everyone and thank you for joining us today. First let me say that we are pleased to report strong second quarter operating results, which mark our fifth consecutive profitable quarter on a non-GAAP basis.

Revenue for Q2 was $61.2 million, essentially in line with our revenue for the same period last year. We continue to experience strong order activity and revenue growth for our NBS-9000. In addition, we continue to invest in innovation and our product portfolio enhancing our overall competitive position.

During the second quarter, we launched the NBS-5200 network border switch ahead of schedule. The NBS-5200 is the highest density and more scalable session border control solution in its class, integrating session management, media inter-working and advanced routing, with native support for IPv6 and IPSec encryption. The NBS-5200 differentiates itself in the marketplace and we are encouraged by early customer interest across all market segments.

The NBS-5200 is currently under evaluations and trials with seven customers. Two weeks ago, we announced our first customer Bluemile, a leading provider of IP data and voice cloud services. This was our first deployment of the NBS-5200 in commercial service.

The product was extremely easy to deploy and Bluemile was able to validate the product in less than two weeks. By combining features that are often deployed by other vendors as separate products into a single, scalable and easy-to-manage network element, we have defined the next frontier in session border control.

The NBS-5200 allows our customers to deploy new revenue generating services and realize significant operational savings. This is our first product running on our next-generation ConnexIP platform. We believe, the NBS-5200 increases our addressable market, positions Sonus to gain market share and establishes leadership in the rapidly growing area of IP to IP session management.

In addition, the NBS-5200 complements our NBS-9000, which continues to show success in the market. Both products formed a SBC solution's portfolio enabling Sonus to address the broader set of SBC deployments for service providers and enterprises. We continue to see strong order activity for NBS-9000 and hybrid trunking products and the opportunity to grow our leadership in this market. Sonus have the unique value proposition in the hybrid trunking space for our NBS-9000 product on the GSX platform serves both, TDM-to-IP and IP-to-IP sessions on the same platform.

During the quarter, we continued to expand our customer base. We have won new business with a major mobile operator in Europe as well as Oni Communications, a leading alternative carrier in Portugal further diversifying our customer base. We have also achieved important wins in the US CLEC market with our hybrid trunking solution.

We made great progress with our Tier 1 customer Belgacom ICS, as we successfully completed its IP-based core network migration. This project was a large undertaking, equivalent to more than 10,000 E1 TDM and SIP trunks, and we are able to successfully complete the migration in less than 15 months.

On the enterprise and channel front, I am pleased to state that we have made good progress with Tier 1 US operator to offer our products and solutions to larger enterprises and have won new business with a large Fortune 500 enterprise through this channel.

Channel development is a key part of our go-to-market strategy. We continue to invest in innovation and look forward to continue to develop new products on the ConnexIP platform demonstrating the versatile nature and wide applicability to this platform to solving our customers' business needs.

In conclusion, we are pleased with the progress we made during the quarter. Our goal remains to lead the industry in the growing IP-to-IP communication space by providing high demand solutions to help our customer succeed in an increasingly competitive environment.

As we move ahead, we continue to leverage our new platform to accelerate growth while extending our leadership with the core products and service offerings across the marketplace.

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

Wayne Pastore

Thank you, Rich and good afternoon, everyone. As Rich said, we are pleased with our results this quarter and with the announcements we have made regarding our new products on our next generation platform.

This afternoon, I will review our financial results for Q2 and then provide an update for our financial guidance for the remainder of 2010. 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.

Now let me recap the results. Revenue for the second quarter was $61.2 million, down from $62.4 million in Q1 2010, and essentially flat from $61.6 million in Q2 2009. Our overall book-to-bill and our product book-to-bill were both below one. There was one customer that contributed greater than 10% of total revenue in the second quarter. That customer was AT&T.

Our top five customers represented approximately 43% of revenue during the quarter, down from 49% in Q1, but up from 42% in Q2 of last year. We reported revenue from 93 customers in the second quarter, including three new customers. This compared to 92 customers in the first quarter and 89 customers in Q2 2009. We are pleased with the progress today with our NBS product family.

Revenues for the first half of 2010 were $12.5 million, and our book-to-bill for NBS products was above one for the first half of 2010. While all of our NBS revenues currently attributed to our NBS-9000, we currently have seven evaluations and trails underway with customers for NBS-5200 product.

Looking at revenue geographically, domestic revenue accounted for 68% of revenue in Q2 versus 58% in Q1 and 78% in Q2 2009. Please note that the timing of deployment schedules and the completion of longer term projects will affect the geographic mix quarter-to-quarter.

Before I go into further details, I'd like to point out that the following are non-GAAP numbers that excludes stock based compensation and amortization of intangible assets in both 2010 and 2009, as well as restructuring charges in 2009.

Non-GAAP gross margin for the second quarter was 64% of revenue, compared to 62% in Q1 and 66% in Q2 2009. Private gross margin for the second quarter was 71% compared to 66% in Q1, and 71% in the same period last year. The improvement in margin from Q1 2010 was related to overall strong margins across all orders recognized as opposed to one single large transaction being recognized. Service gross margins for the second quarter were 53% compared to 56% in Q1 and 60% in Q2 of last year.

Total operating expense for the second quarter was $35.6 million, which was down from $36.6 million in the first quarter and up from $34.8 million in Q2 2009. Included in our Q2 results are costs associated with our CEO transition. We expect these to continue to the remaining quarters of 2010.

Looking at our headcount, we ended the quarter with 917 employees, compared to 868 employees at the end of Q1 with the majority of this increase resulting from the continued investments we are making in R&D.

Now onto some balance sheet highlights. We ended the second quarter with total cash, cash equivalents, marketable securities and long-term investments of $420 million. Our cash balance increased from last quarter, as we generated approximately $11 million of cash from operating activities, which allowed us to continue to invest in capital requirements associated with new product related activities.

We invested $2.5 million in capital expenditures for the quarter. Of that amount over 50% was directly related to investments in our new products. Total deferred revenue was $89 million, up from $84 million in Q1 and up from $83 million in Q2 of last year.

Our higher deferred revenue during the quarter reflects our continued progress with certain long-term projects for which we can invoice, but aren't able to recognize that revenue. AT&T deferred revenue was $26 million in Q2, down from $27 million in Q1 and down from $34 million in Q2 2009.

Now looking forward to the remainder of 2010. We are updating our full-year outlook as follows. We now expect total revenue for the full-year 2010 to be between $225 million and $245 million.

We continue to see the opportunity to grow our NBS product revenue faster than the market. Our 2010 non-GAAP gross margin is expected to be within our longer term target range of 58% to 62%.

Total operating expenses are expected to be in the range of $142 million to $146 million for the year.

For the third quarter, we expect operating expenses to range between $36 million and $38 million in line with our previous expectations. We expect to spend between $3 million and $5 million of CapEx in Q3 as we continue to invest in our new product development initiatives.

We expect ending cash and investments not to drop below $400 million for the remainder of the year. Basic share count for Q3 should be approximately 275 million shares.

In closing, we are pleased with our Q2 operating results and we'll continue to execute on our stated strategies.

We will leverage new products on our next generation platform we'll continue to invest in our core offerings to accelerate our growth and profitability.

With that, let me turn it back to Fran.

Fran Murphy

Thank you, Richard and Wayne. Mohamed, would you please provide our callers with the instructions on how to ask the question?

Question-and-Answer Session

Operator

(Operations Instructions) Our first question comes from the line of Paul Silverstein with Credit Suisse.

Paul Silverstein - Credit Suisse

I apologize, I might have missed all the commentary, but I am hoping you could go back over the NBS-5200 commentary. Rich, maybe could add some color in terms of your thoughts and where the platforms at in both the development and from a customer acquisitions standpoint, and again I know some of this you have in the prepared comments, but maybe you could revisit, if I heard you correctly you've got seven trials. I don't think I heard you mention any customers, but again, Rich, maybe you could give us some color in that particular platform?

Richard Nottenburg

We did mentioned move out and we have seven customer evaluations in trial that's correct.

Paul Silverstein - Credit Suisse

Can you give us some color in terms of the R&D efforts and the customer acquisition dealing about the product, where is at and what's the term in development standpoint as well as you obviously mentioned any addition color you can add how you are feeling about the market penetration efforts, etcetera?

Richard Nottenburg

We are feeling very, very good about the reception of the market to the product; I'll let Guru comment about the development efforts in some more details.

Guru Pai

As you know, we got the product out ahead of schedule. I would like to thank our engineering team and team overall to putting together a pretty significant effort accomplished that. We've got a pretty full roadmap, and we have shared a lot of that with customers. They are excited about the product. They are excited about what we have made available in a form general availability perspective as well as the roadmap going forward.

Then from a customer and market acceptance, we have got our sales team excited about it. It's a pretty important element in our product portfolio and it compliments our NBS-9000 product as well. So, we are feeling pretty good about where we sit right now.

Richard Nottenburg

The other comment I would add is that, we discover in the market is that both intelligent routing and media inter-working seems to be very, very important in the market, and we see that across our, that's in fully respect to our entire NBS portfolio. So, we have made a lot of additions to NBS-9000 and obviously we view that as a part which we learned from and as we basically bring out our old IP part, which is the NBS 5200, so, I think we are feeling very, very good about initial reception, we are also feeling great about some of the advanced features that we have in the product right now, which we'll continue add to as time moves on.

Paul Silverstein - Credit Suisse

Rich, and again, I apologies, if you already address this, the customer you announced in terms of, at the end of your prepared remarks you had mention that there was a new Fortune 500 win for the NBS, that was for the NBS-9000 or that was the 5200, you're referencing?

Guru Pai

That was not for the 5200, it was for the NBS-9000, and the important takeaway from its Paul, that was through a major Tier 1 that we have established the ability, if we [touch] to them as a channel to place Sonus assets on enterprise premises.

Paul Silverstein - Credit Suisse

Did you mention that was…

Guru Pai

Yes, major Tier 1 operator.

Paul Silverstein - Credit Suisse

That's a North American Tier 1 operator or that, do you guys referenced that?

Guru Pai

That's a North American, yes.

Paul Silverstein - Credit Suisse

Rich, explain me on the NBS. In terms of the valuation timeline, I know it's early, but what's your expectation, what should be our expectation from evaluation date to customer wins to revenues. Can you give us some insight on that?

Richard Nottenburg

What we have learned so far is that, from a product perspective these ability, ease of use is the time from opening the box to basic live traffic is actually quite good. I think what Guru said, when he said on last call was this is primarily going to be a bookings year for the 5200, however, I wouldn't discount the fact that we expect to go score some revenue this year on 5200. I think we have a lot more to say about how we are doing in terms of both bookings and revenue expertise in probably next call, but clearly from where we are right now, I wouldn't be that surprise when scored revenue for that product this year as well as obviously a book of business to go along with that for next year.

Operator

Our next question comes from the line of George Notter with Jefferies & Company.

George Notter - Jefferies & Company

I am just expanding upon the prior question. If I look at the seven trials that you guys are in right now, can you talk about the nature of those trials? For example, are these that your enterprises, are they carriers, are these existing Sonus customers, if they are on the carrier side, are they existing customers on the carrier side. Talk a little bit about what the profile of those customers is? That would be great. Thanks

Richard Nottenburg

I don't want to get into too much of the competitive landscape right now there because obviously we are in active competition with several people in the market, but I think you can think about carriers, and then let me let Guru elaborate a little bit more.

Guru Pai

So, George, we've tried to pick and work with those customers, where we can actually exercise all aspects of the product. I just want to make sure you keep in context to where we are in the product lifecycle. We've just announced that that traditional adoption curve of new technology and new products in customer networks remains unchanged.

They are very optimistic about the progress we have made and that our customers have been making with the product, and especially around things that we clearly find ourselves defamatory in the marketplace like embedded, routing, scale as well as the scale and media transcoding. So, I think our customers like exercising that and we feel pretty good about the progress we have made so far.

George Notter - Jefferies & Company

Is it fair to say that there are some carrier customers in the next year?

Guru Pai

Absolutely. Yes.

George Notter - Jefferies & Company

Can you talk a little bit about, as I dig into those trials, is it logical to see some of those trials then convert to revenue this year? Do you think most of these then are revenue for next year, what's the perspective there?

Richard Nottenburg

So, as we said earlier primarily a bookings year, but I would not be surprise to convert some of the 5200 trials into revenue, and my feeling is given how well the 5200 works, essentially what we see right now in terms of customer feedback, we would expect that that product with respect to our other products, we'd be on a much faster trajectory to score revenue from the time the customer opens the box than we have in the past.

It's a very nice product. You could easily use, it's got a great [leeway] and what I have seen from initial customer reaction is they are extremely excited by how fast they can deploy it, so with that thing, you need a very good proxy for our ability to score revenue in relatively short timeframe.

George Notter - Jefferies & Company

Last quick one before I pass along. So, are you limited in your ability therefore to support trials with customers? Is that a gating factor for you, or is just something, where you can send the product out on a company and have a customer really put it through its paces?

Guru Pai

Again, I don't think there is any supply constraint. I just think again it's us making sure that we put the product in as many different scenarios as is reasonable. So, we exercise it to its full ability. So, I think that's the plan that we are going down, most service providers are very methodical and very deliberate in how they place new products in their networks. There is a normal certification and adoption cycle that we have got to go through, and we're working our way through that.

Operator

Our next question comes from the line of Catharine Trebnick with Avian Securities.

Catharine Trebnick - Avian Securities

Two questions. One, I heard you say that you had made intelligent routing additions to the NBS-9000. So, how many new features were added in the quarter to the NBS-9000?

Guru Pai

Catharine, just to clarify, so the 5200, the PSX is the standalone product from the 9000 product, so rest are the 5200. So it's our PSX intelligent routing platform now running on the NBS-5200, so you don't have to buy a separate element

Catharine Trebnick - Avian Securities

That makes a big difference, because I was a bit confused by that. Thank you and then my housekeeping question is, what was North America revenue or between North American and international?

Wayne Pastore

Our domestic revenue was 68% of the total, Catharine.

Operator

Our next question comes from the line of Natarajan Subrahmanyan with SMH Group.

Natarajan Subrahmanyan - SMH Group

I have two questions. First, if you could talk about orders? You had mentioned that product and overall book-to-bill was below 1, so that usually typically the quarter in which that book-to-bill tends to be a little bit stronger, so I was just trying to understand what the trend was that and what it implies for guidance for this right now? The guidance, even at the high-end of the range suggests fairly flat revenues into second half or first half despite an expectation that carrier CapEx improves. That's the first question.

The second question is on the new Fortune 500, I wanted to make sure this is different from Fortune 50 Financial Services customer given a couple of quarters ago and if you could talk a little bit about that channel the relationship?

Wayne Pastore

Subhu, I'll take the first half of the question. First of all on the book-to-bill, yes, was below one for quarter and year-to-date, and that's December profile to the same time last year, we were at book-to-bill for both, Q2 and year-to-date last year.

I think the second half of the question was related to the different customer, the enterprise.

Richard Nottenburg

On the enterprise front, let me just kind of reiterate just a couple of things here. First of all, we see enterprise from a, I think from an opportunity space from a firm opportunity space is actually quite interesting to us. It's not just among financial services, it's actually cut across a couple different segments of that market.

So I think for us, when we see good opportunities, we got a good funnel there, and I think the most important that we, I think even important in terms of the customer, initial customer was the fact that we are basically brining that revenue to Tier 1 operator channel as part of our go-to-market strategy, that's very, very important. I stress in terms of script, but I think that's important in terms of how we plan to go to one. One of the methodologies by which we plan to go to market there.

Wayne Pastore

Subhu, to just clarify one thing. On the updated guidance, the high end of the range is at 245, but actually we have an 8% increase over the last year and on previous calls, we did guide from flat to single digit growth, low single digit growth. So little bit of an up-tick.

Natarajan Subrahmanyan - SMH Group

Yes, I was just looking second half versus first half, it seems to suggest a relatively flat trend versus typically for Sonus, second half has been stronger and I was just trying to contrast versus the historic.

Unidentified Company Representative

Subhu, let me just put a little more color on that. There is a lot of spending that's potentially, the things happened in Q4, with the budget flushes and various types of carriers may happen.

Right now, we don't have very good visibility into that. Obviously, if you look at look at your business over the last couple of years, with the exception obviously of the 2008, there is potential for significant amount of additional spending in Q4. We're just not prepared to make call on that right now, and that's what we think about the guidance we have.

Richard Nottenburg

I think also, Subhu, we are sticking with a conservative approach. We do have some longer term projects that records still very complex issue with some of the deals. So, that's why've kept the conservative approach.

Natarajan Subrahmanyan - SMH Group

The new Fortune 500 customer that's different from the Fortune 50 customer a couple of quarters ago.

Richard Nottenburg

Yes, Subhu, they are two different companies and two different industries.

Fran Murphy

Mohammad, do we have anyone else queued up for question?

Operator

We have a follow-up question from the line of Catharine Trebnick with Avian Securities.

Catharine Trebnick - Avian Securities

My other question has to do with, can you say overall between your carrier and your enterprise customers what the split would be, because historically you have sold into Banc of America, other companies, which are large media gateway softswitches, so do you have a breakdown between the two right now?

Wayne Pastore

Catharine, we don't disclose that breakdown, but the majority of the revenue is from the carrier space.

Catharine Trebnick - Avian Securities

Can you give us any more color on why the book-to-bill is down, and seems like your revenue guidance is up, but the book-to-bill is down, so any more color on that would be helpful.

Wayne Pastore

I would just say, from a visibility perspective, we do see the orders. I think just some of them moved out a little bit. I think it's pretty consistent with prior years, the first half of the year being below 1, I think also with the revenue of $61 million doesn't necessarily mean that the bookings were extremely low.

Operator

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

Greg Mesniaeff - Needham & Company

I have a two-part question on the 5200. Of the seven customers that the product is in trial with, how many of them are end user customers whether they'd be carriers or enterprise and how many of them are potential equipment partner, such as Alcatel Lucent or whoever?

Richard Nottenburg

They are all direct to the end customers as you have put it.

Greg Mesniaeff - Needham & Company

The second part of my question is, what kind of a strategy do you envision for the 5200 in terms of partnering with other equipment solutions providers to the carriers?

Guru Pai

I think our strategy with this 5200 is obviously we're going to continue to attack the customers that we obviously are directly. At the same time, we are going to look at some of the channel partners trying to develop. During the quarter, we blocked revenue basically through a Tier 1 operator North America. We see that as a very viable approach and we are going to continue to chip away at the channel relationships.

Greg Mesniaeff - Needham & Company

So it's a really a direct sales strategies by no means the only one you are going to be pursuing there?

Wayne Pastore

Absolutely not, right. So we will work to get the 5200 in particular to market direct through our operator, through operator channels to value-added resellers as well as the traditional what we call large network equipment vendors.

Richard Nottenburg

The other thing I would like to remind you here is that the 5200 from either used perspective blends itself very well to being resold by systems OEMs. There is no reason, why we can't do this. I feel very good about that.

Greg Mesniaeff - Needham & Company

Any color you can do to that, Rich, as far as what you have done in that particular area vis-à-vis the potential partners?

Richard Nottenburg

Not at this time.

Operator

Our next question comes from the line of Melissa Fairbanks with Raymond James.

Todd Koffman - Raymond James

This is Todd Koffman, Raymond James. If I could just ask you called out in your commentary that you thought the NBS segment of your business would I think outgrow the market, can I just ask what percentage of your current revenue reflects your NBS business?

Wayne Pastore

Our revenue was $12.5 million for the first six months and total revenue about $123 million.

Todd Koffman - Raymond James

This is the follow-up how when you call out that you think that business will outgrow the growth rate of the market, I guess, the next six months. How fast do you think that market growth rate is?

Wayne Pastore

I think the number were sort of working is in the 30s in the 30% ranges, is sort of what we're at, I think that market, that number is sort of withdrawn out there, that's allows us. So I think from our perspective, again, we look at the NBS-9000 revenue as, we had in a pretty decent bookings on it and we continue to make decent traction.

Todd Koffman - Raymond James

Yes, 2.5 million in quarter.

Wayne Pastore

Try to hear the further question on it?

Todd Koffman - Raymond James

No, I am good.

Operator

We have a follow-up question from the line of Paul Silverstein with Credit Suisse.

Paul Silverstein - Credit Suisse

Two questions. One, AT&T did you say we're in what the dollar contribution per se contribution was, I know we were greater than 10 but the start what you have given us the exact percentage?

Wayne Pastore

They were 14% in total.

Paul Silverstein - Credit Suisse

I appreciate that. Secondly, Rich, does it go without saying that in terms of your exciting media gateway business why you guys aren't waiting to see the impact of the new NBS platform that the existing media gateway business is pretty much dependent upon the existing customer base continuing to order and doing more, and you are not expecting nor should we expect much in the way of new customer contribution. If I am look, it looks like you've got a handful of customers, new customers the last several quarter, it's unlikely that's going to change, correct?

Richard Nottenburg

We actually reported the European mobile operator, maybe Guru you could collaborate on that.

Guru Pai

I just want to make sure that our understanding is correct. All the new customers that be announced both last year and this year have been GSX platform as the product that we have sold and earned revenue from.

In many of those cases, in fact, in a majority of cases, we do sell a lot of TDM ports in addition to NBS on certain chassis. We don't expect that piece of the business to have the negative connotations that it going away.

We believe and we are the market leader there and we can win in that market segment globally and there is some pretty significant networks wins that Rich referenced in his script that we have achieved this quarter as well.

So we've had that, I am sorry?

Paul Silverstein - Credit Suisse

I apologize I didn't mean to suggest the business is or is not going away. I am just trying to understand and why don't I just ask the question directly. If we look at the revenue contribution for the existing media gateway business, how much of that came from existing customers this quarter, last quarter, the quarter before, how much of the revenue generation came from new customer wins?

Wayne Pastore

I would say the majority of the revenue this quarter came from existing customers.

Paul Silverstein - Credit Suisse

I trust the majority but can you give us any more granular. We just spoke to some new customer contribution. Is that 10% or less? Is it greater than 10%?

Wayne Pastore

I would say, for this quarter, existing customer's have generated at least 90% of the revenue.

Paul Silverstein - Credit Suisse

Then how about last quarter?

Wayne Pastore

It was between 80 and 90.

Paul Silverstein - Credit Suisse

80, 90, just is a rough cut, new customers at least the last handful of quarters, they have been contributing 10% to 20% of the media gateway business revenue? 40%?

Wayne Pastore

Yes.

Operator

Our next question comes from the line George Notter with Jefferies & Company.

George Notter - Jefferies & Company

You mentioned in the operating expense discussion that there were some costs that were flowing through associated with the CEO search. I guess, I am just curious what how much those costs were and then related to CEO search itself, any sense for timing. Can we get an update there? That'd be great.

Richard Nottenburg

George, I'll do the first part. On the costs in our non-GAAP numbers, it's running about a $0.5 million a quarter to the stock comp piece of the GAAP to non-GAAP it was about $500,000 this quarter also.

George Notter - Jefferies & Company

Then on timing, is it something we could expect to see in the fall timeframe, we think this could stretch into the winter. What's your sense for it?

Richard Nottenburg

The only comment I can make is that the board is conducting a very thorough and fulsome search and then we'll update when we have information.

George Notter - Jefferies & Company

Just extending on that a little bit. Can you talk through the profile that of course in our candidate that might make the most sense in that role going forward, any thoughts there, that would be helpful? Thanks.

Richard Nottenburg

I appreciate the question, but it's probably not the thing we want talk about in a conference call. The answer is obviously we look for the best candidate for the job and through a very through search and we'll get that job done in a more expeditious manner.

Operator

We have a follow-up question from the line of Paul Silverstein with Credit Suisse.

Paul Silverstein - Credit Suisse

Rich, you guys put out a press release with the handful respect about your, I think it was the worldwide head of sales walking or leaving and I am hoping that you could give us a little bit of insight there and as importantly on replacing that individual, where you're at?

Richard Nottenburg

Yes, Mohamed decided to leaving, Guru is conducting a search for replacements as you speak.

Paul Silverstein - Credit Suisse

So the individual, this wasn't the individual you are forcing out, Mohamed decided to go for different opportunity or any color you can give us?

Richard Nottenburg

First of all, it's September 30th and he decided to leave, or he left on his own.

Paul Silverstein - Credit Suisse

That search is in process?

Guru Pai

Yes, it is.

Fran Murphy

Operator, do we have anyone else queued up for question.

Operator

Yes, sir. We have a question from line Ari Bensinger with Standard & Poor's.

Ari Bensinger - Standard & Poor's

Just on the gross margin profile. Last quarter you came in at top end of the 58% to 62%, you mentioned revenue recognition of single large project. This quarter you are coming in at 64%. Is there any reason and we didn't see any special reasons why that would have been at this level, is there anything that would to say the gross margins would go down from the levels you have seen in the last two quarters?

Wayne Pastore

I think on a quarter by quarter they do fluctuate and just in back historically I think our guidance 58% to 62% is in the range historically on the longer term basis. We don't see anything near-term that one single item would drive either way?

Ari Bensinger - Standard & Poor's

In terms of operating expenses should we continue to see a churn down from what it has done the last three quarters?

Wayne Pastore

I think the range of $36 million to $38 million is a pretty good range going forward.

Fran Murphy

Mohamed do we have anyone else queued up for question.

Operator

Sir, there are no further questions at this time.

Fran Murphy

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

Operator

Ladies and gentlemen, that does conclude today's conference call. To listen to our replay of this call you will be provided with a link where you can dial-in to the call and re-listen to it approximately one hour after the conclusion. Ladies and gentlemen, have a great day and thank you for joining us today.

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