Sonus Unlikely to Be Punished for Options Scandal

Many shareholders were probably asking the same question as they come home from work last night and saw that Sonus Networks Inc. (SONS) had been roughed up during yesterday's trading session. The stock dropped $.66, or 9%, to $6.67 on heavy volume of 9.7 million shares, continuing a three day skid that has knocked 15% off the value of Sonus shares.

Apparently, what is spooking investors is the hoopla surrounding Sonus' option scandal and as a result, the company's inability to file one of its Form 10-Ks. The company recently disclosed that it expects the Securities and Exchange Commission to issue a formal order of investigation. When this occurs, SEC staff is able to compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following the investigation, the Commission can authorize the staff to file a case in federal court or bring an administrative action if warranted.

However, this is all unlikely. Though the market might be indicating otherwise, the company's audit committee completed its investigation of stock option practices and accounting and found no improper conduct or violation of company policies by any member of the current management team.

And look at the company's recent earnings report released last Wednesday afternoon that blew away analyst expectations. This should bolster the case for those holding long positions. Revenues for the fourth quarter of fiscal 2006 were $79 million compared to $75 million in the third quarter of fiscal 2006. Analysts were expecting revenue of $68.2 million. Revenues for the full year fiscal 2006 were $279 million. Cash, cash equivalents and investments increased by $47 million during 2006, to $361 million.

Looking ahead, the future is bright. Yesterday's Annual Institutional Investors Conference featured Sonus Chief Technology Officer Vikram Saksenal who gave a pretty good outlook on Sonus.

Here are some notes: 2006 was a good year in which Sonus continued to dominate with IP traffic over their networks exceeding thirty billion minutes per month, four times greater than their nearest competitor. Industry growth is continuing as migration into IP voice occurs. 2007 prospects look equally bright as existing customers launch into IP voice. Sonus as an incumbent in the new carriers, gives the company a good position in the new consolidated AT&T. Partnership with Motorola in WIMAX networks paying off. Not worried about Ericsson competition in IP services. Large carriers in trunking space, Verizon and KDDI migrating entire IP core network using Sonus technology over the next couple of years.

SONS 1-yr chart: